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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] 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
(Name of small business issuer in its charter)
Delaware 75-2571032
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.01 per share
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the issuer was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
YES X NO
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained herein, and none will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year were: $25,349,736.
The aggregate market value of the voting common and non-voting stock held by
non-affiliates of the issuer, based on the average bid and asked price of such
stock, was $1,769,129 as of February 23, 1999.
At March 1, 1999, the registrant had outstanding 41,788,552 shares of par value
$.01 common stock.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Transitional Small Business Disclosure Format (check one):
Yes No X
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TABLE OF CONTENTS
ITEM 1. DESCRIPTION OF BUSINESS............................................. 1
General................................................................... 1
Forward Looking Statements................................................ 1
Restructure of OM Operating, L.L.C........................................ 1
Restructure of River Port Truck Stop, LLC................................. 3
Merger with OM Investors, Inc............................................. 4
Acquisition of Ozdon Investments, Inc..................................... 4
Acquisition of GalaxSea and I.T. Cruise................................... 5
Development of River Port Truck Stop...................................... 5
Gaming Industry Restrictions on Stock Ownership........................... 6
Operation of Truck Stop Facilities........................................ 6
The Gold Rush - Opelousas, Louisiana................................. 6
King's Lucky Lady - Port Barre, Louisiana............................ 7
Pelican Palace - Toomey, Louisiana................................... 7
Port Allen, Louisiana................................................ 8
Assignment to OM Operating, L.L.C......................................... 8
License Renewal Process................................................... 8
Operation of Video Poker Casinos.......................................... 9
The Gold Rush - Opelousas, Louisiana................................. 9
King's Lucky Lady - Port Barre, Louisiana............................ 9
Pelican Palace - Toomey, Louisiana................................... 9
Lucky Longhorn - Vinton, Louisiana................................... 10
The Diamond Jubilee - New Orleans, Louisiana......................... 10
Port Allen, Louisiana................................................ 11
Video Poker Tavern Route.................................................. 11
Cruise Franchise and Travel Operations.................................... 11
Marketing and Competition................................................. 12
Marketing............................................................ 12
Gaming Operations............................................... 12
Cruise and Travel Operations.................................... 12
Competition.......................................................... 12
Gaming Operations............................................... 12
Cruise and Travel Operations.................................... 13
Employees................................................................. 13
Environmental Matters..................................................... 13
Regulation and Licensing - Gaming Operations.............................. 13
Louisiana............................................................ 13
Device Owner's License.......................................... 13
Establishment License........................................... 15
Recent Changes in Louisiana Act................................. 15
Other States......................................................... 16
Federal Regulation................................................... 17
Regulation - Cruise and Travel Operations................................. 17
Restrictions on Stockholders; Mandatory Disposition if Found Unsuitable... 17
Insurance................................................................. 17
ITEM 2. DESCRIPTION OF PROPERTY............................................. 17
ITEM 3. LEGAL PROCEEDINGS................................................... 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................. 18
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............ 19
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION........... 20
ITEM 7. FINANCIAL STATEMENTS................................................ 27
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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE................................. 27
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL................ 27
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.......... 29
ITEM 10. EXECUTIVE COMPENSATION.............................................. 29
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...... 30
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................... 32
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.................................... 39
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NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION
PART I
ITEM 1. DESCRIPTION OF BUSINESS
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General
North American Gaming and Entertainment Corporation (the "Company") was
incorporated under the laws of the State of Delaware in 1969. The Company
changed its name from Western Natural Gas Company to North American Gaming and
Entertainment Corporation on October 17, 1994 in connection with its merger (the
"Merger") with OM Investors, Inc. ("OM"). Following the Merger, the Company
has concentrated its business in the gaming industry and will continue to pursue
additional opportunities and developments in this industry, as well as in other
industries, such as the travel industry. See "Acquisition of GalaxSea and I.T.
Cruise", below. References hereinafter to the Company shall include OM and the
Company's other subsidiaries (including OM Operating, L.L.C. and River Port
Truck Stop, LLC), on a consolidated basis, unless the context clearly indicates
otherwise.
Forward Looking Statements
This Form 10-KSB includes certain statements that are not historical facts
and are deemed to be "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. See Item 6 -"Management's
Discussion and Analysis or Plan of Operations -- Forward Looking Statements" for
a further discussion of these "forward-looking statements".
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 OM Operating, L.L.C. ("Operator") to effect a
restructuring of Operator which the Company believed effectively addressed
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. See
"Assignment to OM Operating, L.L.C." and "License Renewal Process", below. The
Company elected to voluntarily effect the restructure of Operator even though
the Gaming Control Board had 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"). However, after the Company
presented the Amendment and related documents to the Division, the Company had a
meeting on November 13, 1998 with the Division, wherein the Division expressed
serious concerns and doubts that the Amendment would satisfy the Louisiana Act
and indicated the Division would recommend that Operator's license to operate
video poker casinos in Louisiana not be renewed, unless various changes were
implemented to comply with the Louisiana Act. Among the concerns expressed by
the Division were the 20% gross income allocation to the Company under the
Operating Agreement and its contribution, pursuant to the Amendment, by the
Company to Operator for additional interests in Operator which were then
assigned to Williams in exchange for a $4 million nonrecourse note (the "Note"),
in addition to certain other aspects of Amendment No. One and the related
documents. Rather than risk loss of the Operator's license, the Company has
entered into further amendments to the Operating Agreement and various documents
put into place in conjunction with the Amendment, and has agreed to transfer 50%
of its remaining Louisiana gaming interests (including 50% of its interest in
Operator, River Port Truck Stop, LLC and the Gold Rush Truck Stop) to certain
former holders of Class A Preferred Stock of the Company and certain related
persons and entities in exchange for mutual releases and settlements, dismissal
of pending litigation and cancellation of debentures, accrued dividends and
Common Stock of the Company ("Common Stock"). The Company believes the further
restructuring of Operator effectively addresses the concerns raised by the
Division. The Company has submitted to the Division and Gaming Control Board
the documents effecting the further restructure of Operator for their review in
connection with 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 further restructured, complies
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with the residency requirements of the Louisiana Act, but the Company believes
the Gaming Control Board will agree with such restructure and with the Company's
conclusion.
As part of the further restructure of Operator, the Company entered into a
Release and Settlement Agreement (the "Settlement Agreement") with, among
others, Williams and ten former holders of Class A Preferred Stock of the
Company (the "North Louisiana Group") on February 2, 1999, but to become
automatically effective as of March 31, 1999. At February 2, 1999, the North
Louisiana Group owned 5,614,632 shares of Common Stock (representing
approximately 13.4% of the issued and outstanding shares of Common Stock) and
were owed $306,959.61 in original principal amount of subordinated debentures,
and were owed accrued dividends of $254,982 accrued on the Class A Preferred
Stock prior to its conversion to Common Stock. As part of the Settlement
Agreement and pursuant to related documents executed in connection therewith,
the North Louisiana Group agreed, among other things, to (i) dismiss with
prejudice its pending lawsuit against the Company for the payment of accrued
dividends and agreed to cancel all accrued dividends payable to the North
Louisiana Group; (ii) mark their subordinated debentures "canceled" and return
them to the Company and cancel all principal and accrued interest thereunder;
(iii) return to the Company for cancellation 5,614,632 shares of Common Stock
owned by the North Louisiana Group; (iv) be responsible on a 50/50 basis with
the Company for any funds expended in settlement with any other former holders
of Class A Preferred Stock which the Company may desire to pursue; (v) assume
50% of the debt owed by the Company, to Regions Bank, Springhill Branch,
formerly known as Springhill Bank & Trust Company, relating to the Company's
Gold Rush Truck Stop; and (vi) release all claims, known or unknown, which the
North Louisiana Group might have against, among others, the Company,
International Tours, Inc. ("International") and the officers and directors of
the Company as of the date of the Settlement Agreement. In return, the Company
(a) released all claims it might have, known or unknown, against, among others,
the North Louisiana Group as of the date of the Settlement Agreement; (b) agreed
to assign to one or more members of the North Louisiana Group a 24.5% interest
in Operator and a 25% interest in River Port Truck Stop, LLC ("River Port LLC");
and (c) agreed to assign to one or more members of the North Louisiana Group 50%
of the Company's ownership of the Gold Rush Truck Stop.
Under the Settlement Agreement, Williams agreed to release all claims he
might have, known or unknown, against, among others, the Company, International,
the officers and directors of the Company and the North Louisiana Group as of
the date of the Settlement Agreement, and the Company agreed to release all
claims the Company might have, known or unknown, against, among others, Williams
as of the date of the Settlement Agreement. Williams also agreed, among other
things, to (i) mark his subordinated debenture in the original principal amount
of $93,900 "canceled" and return it to the Company and cancel all principal and
accrued interest thereunder; (ii) return to the Company for cancellation 824,000
shares of Common Stock owned by Williams, 1,279,000 shares of Common Stock owned
by P. & J. Williams, L.L.C. (an affiliated entity) and 450,000 shares of Common
Stock owned by New Orleans Video Poker Company, Inc. (an affiliated entity), an
aggregate of 2,553,000 shares (representing approximately 6.1% of the issued and
outstanding shares of Common Stock); (iii) cancel the $78,000 of accrued
dividends payable to Williams accrued on the Class A Preferred Stock prior to
its conversion to Common Stock; and (iv) pay to the Company certain amounts
which could aggregate between $150,000 and $300,000 over six years in
conjunction with the possible additional settlements by the Company with other
former holders of Class A Preferred Stock which the Company may desire to
pursue. The Company and Williams also entered into amendments to several other
existing agreements in connection with the Settlement Agreement as described in
the following paragraphs.
The Company and Williams entered into a Second Amendment (the "Second
Amendment") to Operator's Operating Agreement, effective March 31, 1999. The
Second Amendment operates to amend the Operating Agreement, as amended by the
Amendment, to delete all references to the Note and to the contribution of the
20% special gross income allocation so that neither provision shall ever have
been deemed to have existed and neither provision shall have ever been of any
force or effect. As a result, the Note is deemed to never have existed and the
20% special gross income allocation was not deemed to have been contributed by
the Company for additional ownership interests in Operator. Under the Second
Amendment, the Operating Agreement was amended to terminate, and to delete all
references to, the 20% gross income allocation after March 31, 1999 and no
further allocation or distributions will be made to the Company pursuant to such
20% special gross income allocation. Thereafter, distributions will be made in
accordance with capital accounts and the Sharing Ratios of the Members, which
will be 51% to Williams, 24.5% to the Company and 24.5% to one or more members
of the North Louisiana Group; provided, however, Williams is entitled under the
Second Amendment to distribution of the initial $4,166 to be distributed per
month up to a maximum of $50,000 per year, which distributions are to be
credited against any other distributions to Williams during such year. Pursuant
to the Second Amendment, Operator will no longer be managed
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by a manager and, instead, will be managed by the members, who shall take
actions by the vote of members owning at least 65% of the Sharing Ratios, except
for certain enumerated major decisions which require unanimous vote. Related
agreements were also entered into effective as of March 31, 1999 canceling the
Note and the Company's security interest in the ownership interests of Williams
securing the Note.
The Company and Operator also entered into a Termination of Consulting and
Administrative Agreement (the "Termination") effective March 31, 1999. The
Termination has the effect of terminating the Consulting and Administrative
Agreement entered into between the Company and Operator on April 15, 1998 (the
"Consulting Agreement") pursuant to which the Company agreed to provide
consulting and administrative services relating to the daily management of each
of Operator's video poker casinos, and pursuant to which the Company received 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.
Williams and Operator also entered into a Second Amendment to Employment
Agreement (the "Employment Amendment") effective March 31, 1999 which amends the
Employment Agreement dated April 15, 1998 pursuant to which Williams received an
annual salary of $250,000, was eligible to participate in any employee benefit
plans of Operator, was furnished the use of a company automobile and was
reimbursed for expenses incurred on behalf of Operator during the course of his
employment. Under the Employment Amendment, Williams will receive an annual
salary of $100,000 and will continue to be eligible to participate in any
employee benefit plans of Operator, but will no longer be furnished the use of a
company automobile or be reimbursed for expenses. Under the Employment
Agreement, as amended by the Employment Amendment, the Employment Agreement
terminates on March 31, 2004.
As part of the Settlement Agreement, the Company and Operator have modified
the terms of the lease of the Gold Rush Truck Stop by the Company to Operator.
The Company and Operator have entered into a Lease Agreement (the "Lease")
effective March 31, 1999 for an initial term of six months and thereafter to be
a month-to-month lease until terminated by either party, with or without cause,
on 60 days' prior written notice. The Company will be responsible for major
repairs and Operator will be responsible for nonmajor repairs and maintenance,
and Operator will pay a rental of $33,333.33 per month for the term of the
Lease. The Company and Williams also mutually agreed to terminate the right of
first refusal previously granted to Williams to purchase the land and buildings
constituting the Gold Rush Truck Stop, or any portion thereof, if the Company
proposed to sell them to a third party. In conjunction with the Lease, the
Company has agreed to be solely responsible for the indebtedness to Regions
Bank, Springhill Branch, formerly known as Springhill Bank & Trust Company,
which is secured by a mortgage on the Gold Rush Truck Stop. As of December 31,
1998, the outstanding principal balance of such indebtedness was approximately
$613,000.
Pursuant to the Second Amendment, the parties agreed to delete the
requirement 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.
Effective March 31, 1999, all parties will be free to pursue any video poker
gaming opportunities they may desire without first offering the opportunity to
Operator or any other member. Likewise, Williams is no longer entitled to
receive a finder's fee of $50,000 for each opportunity brought by him to
Operator which is consummated by Operator.
As part of the Settlement Agreement, Williams and the Company also agreed
that to the extent any of the truck stop, convenience store, restaurant or
gaming interests that are part of King's Luck Lady, Pelican Palace, Lucky
Longhorn, The Diamond Jubilee or the Video Poker Tavern Route are held or
operated in the name of the Company, effective March 31, 1999 they shall be
deemed to be in the name of and operated by Operator.
Restructure of River Port Truck Stop, LLC
Pursuant to the Settlement Agreement, the Operating Agreement of River Port
LLC (the "River Port Operating Agreement") was also amended to provide that it
shall be managed by the members in the same manner as described above for
Operator under its amended Operating Agreement, and to provide that Williams
will own 50% of the membership interests and Sharing Ratios, and the Company
will own 25% and one or more members of the North Louisiana Group will own the
remaining 25%. Other conforming changes were made to make the River Port
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Operating Agreement consistent with the Operating Agreement of Operator, as
amended by the Second Amendment. The amendments to the River Port Operating
Agreement also became effective March 31, 1999.
Merger with OM Investors, Inc.
Effective October 17, 1994, the Company acquired by triangular merger all
of the assets and liabilities of OM in exchange for 10,000,000 shares of the
Company's common stock ("Common Stock") and 1,600,000 shares of the Company's
Class A preferred stock (each share of which was initially convertible into one
share of Common Stock) ("Class A Preferred Stock"). Such shares of Common Stock
and Class A Preferred Stock were issued pursuant to a registration statement on
Form S-4, Commission file no. 33-79384 (the "Form S-4 Registration Statement"),
filed with the Securities and Exchange Commission ("Commission") that became
effective July 28, 1994. The Merger was approved by the stockholders of both
the Company and OM at special meetings held August 23, 1994. The Class A
Preferred Stock had a par value of $3.00 per share and bore a 10% annual
cumulative dividend on par value; had a liquidation preference over Common Stock
equal to its par value plus any accumulated and unpaid dividends; was redeemable
by the Company at a redemption price equal to its par value plus any accumulated
and unpaid dividends; was convertible into Common Stock on a share-for-share
basis (subject to certain anti-dilution adjustments); and was entitled to vote
together with Common Stock as a single class, and not as a separate class
(except where expressly mandated and required by law, or in connection with an
amendment to the Company's Certificate of Incorporation to alter the rights of
Class A Preferred Stock), on all matters to be presented to the holders of
Common Stock, with the holders of Common Stock and the holders of Class A
Preferred Stock being entitled to one vote for each such share held. In
connection with the acquisition of GalaxSea Cruises and Tours, Inc. and I.T.
Cruise, Inc., various adjustments were made to the Class A Preferred Stock and
313,000 shares were redeemed for a $939,000 subordinated debenture of the
Company. See "Acquisition of GalaxSea and I.T. Cruise", below.
Prior to consummation of the Merger, OM operated the truck stop facilities
and video poker casinos in two truck stops in Louisiana, the video poker casinos
in three other truck stops in Louisiana and the video poker devices for a route
of 18 bars and restaurants ("taverns") in Louisiana. Upon consummation of the
Merger, OM contributed and assigned all of its rights, duties and obligations to
operate the five existing truck stop video poker casinos and the tavern route to
Operator, a Louisiana limited liability company owned 49% by OM and 51% by
Donald I. Williams, a former director and Vice President of OM. OM also
contributed its interest in 259 video poker machines to Operator, subject to
approximately $861,098 of debt (as of the effective date of the Merger) which
Operator agreed to pay. Effective December 15, 1995, the Company caused OM to
be merged into the Company and OM ceased to exist as a separate legal entity.
The Company is now the owner of the interest in Operator.
Acquisition of Ozdon Investments, Inc.
On December 15, 1995 ("Closing"), but to be effective November 1, 1995, the
Company acquired 100% of the issued and outstanding capital stock of Ozdon
Investments, Inc. ("Ozdon") in exchange for 600,000 shares of the Company's
Common Stock and $1 million in principal amount of Notes (the "Notes") payable
by the Company to the shareholders of Ozdon ("Shareholders"), which Notes bear
interest at 9% per annum, are payable in 36 equal monthly payments of principal
and interest, and are secured by a pledge of the net cash flow generated from
the Gold Rush truck stop video poker casino. The acquisition price was based on
a third party appraisal, utilizing a discounted cash flow for a two year holding
period. Lamar E. Ozley, Jr., the former President, Chief Executive Officer and
Chairman of the Board of the Company, owned 46.5% of the outstanding shares of
Ozdon and his wife owned 2% of such outstanding shares. Williams also owned
46.5% of the outstanding shares of Ozdon, but transferred such shares to an
affiliated limited liability company prior to the Closing. The Company agreed
to dissolve and liquidate Ozdon into the Company following Closing, and to
distribute the assets used in the gaming operations of Ozdon (including 50
gaming devices), subject to liabilities of approximately $91,100, to Operator.
This distribution to Ozdon was made effective as of the date of Closing, but the
Company subsequently decided to retain Ozdon as a wholly owned operating
subsidiary and did not consummate the dissolution.
Ozdon owned and operated a truck stop and video poker casino in Opelousas,
St. Landry Parish, Louisiana, at the intersection of Interstate Highway 49 and
U.S. Highway 167, approximately 20 miles from Lafayette, Louisiana. The Company,
through Ozdon, will continue to own and operate the truck stop facility, and
Operator will operate the video poker casino pursuant to an operating agreement
with the Company. Operator now owns all of the video poker machines and assumed
approximately $91,100 of indebtedness related to such machines and operations.
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The truck stop and video poker casino is known as the "Gold Rush Truck Stop and
Video Poker Casino" ("Gold Rush").
Acquisition of GalaxSea and I.T. Cruise
On June 10, 1996, the Company acquired 100% of the issued and outstanding
capital stock of GalaxSea Cruises and Tours, Inc. ("GalaxSea") and 100% of the
issued and outstanding capital stock of I.T. Cruise, Inc. ("I.T. Cruise") from
International Tours, Inc. ("International"). Both corporations were wholly
owned subsidiaries of International.
GalaxSea was acquired by virtue of a merger with a newly created wholly
owned subsidiary of the Company under the terms of which the Company issued
4,934,106 shares of Common Stock and 8,000,000 shares of a newly designated
series of the Company's preferred stock, par value $.01 per share, designated as
Series B Convertible Preferred Stock ("Series B Preferred Stock"). The 8,000,000
shares of Series B Preferred Stock were entitled to one vote for each share
issued and voted together with the Common Stock as one class, and not as a
separate class (except as mandated by law). As a result of this acquisition,
International is the largest stockholder of the Company, owning approximately
44% of the voting stock. Simultaneously with the closing of the merger with
GalaxSea, the Company also restructured its existing, outstanding Class A
Preferred Stock by redeeming 313,000 of the 1,600,000 outstanding shares for a
$939,000 subordinated debenture, placing an agreed moratorium on the accrual of
dividends for two years and obtaining from the holders of Class A Preferred
stock the right to force conversion of the remaining 1,287,000 shares of Class A
Preferred Stock into 8,240,000 shares of Common Stock at any time within the
next two years. In the event of any such forced conversion, as part of the
merger transaction, International was granted anti-dilution protection and was,
upon the issuance of such shares of Common Stock to the former holders of Class
A Preferred Stock, 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
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 continued to exist as accrued
dividends payable.
I.T. Cruise was acquired in exchange for $100,000 cash and a promissory
note in the principal amount of $1,400,000 payable by the Company to
International. The promissory note bears interest at nine percent per annum, is
payable in 31 equal monthly installments of $50,000 each and one final
installment of $27,414.22, and is secured by a pledge of the outstanding capital
stock of GalaxSea and I.T. Cruise owned by the Company.
GalaxSea is an Oklahoma corporation that was formed in September 1995.
Effective October 1, 1995, GalaxSea acquired substantially all of the operating
assets of GalaxSea Associates, Inc. ("GAI"), a Florida corporation. GAI had been
in the business of franchising "cruise only" retail travel stores since 1988.
The principal business of GalaxSea is the granting of franchises for the
operation of travel vacation stores that specialize in the marketing and selling
of cruise travel, tours and related travel arrangements according to the concept
and business system developed by GalaxSea and GAI.
I.T. Cruise is an Oklahoma corporation that was formed in 1993. I.T.
Cruise has served as the cruise marketing division of International since that
time. The principal business of I.T. Cruise is to coordinate cruise marketing
programs between the various major cruise lines and International's network of
approximately 900 travel agency locations.
Development of River Port Truck Stop
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
Calloway ("Lessor") to lease property in Port Allen, Louisiana, 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
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the commencement of video poker operations the Additional Rent would be 5%
(rather than 10%) and that commencing with the 25th month of video poker
operations the Additional Rent would be 10% of Net Revenue. RPTS assigned the
lease to 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 Williams to build
and operate a video poker casino, restaurant, truck stop and convenience store
on the leased property. See "Restructure of River Port Truck Stop, LLC", above.
A convenience store and fuel facility was operated from June 1, 1997 until July
21, 1998 by the Company, through its subsidiary RPTS, and effective July 21,
1998 the operations were taken over by River Port LLC. On January 10, 1999,
River Port LLC entered into a Convenience Store and Restaurant Sub-Lease (the
"Sublease") and a Fuel Service and Truck Stop Operating Agreement (the "Fuel
Service Agreement") with RVC Operations, L.L.C., a nonaffiliated limited
liability company ("RVC"), pursuant to which RVC will operate the restaurant,
convenience store and truck stop for an initial term of 15 years with an option
to extend for an additional 15 years, in exchange for an escalating annual base
rent ($42,000 in year 1, $84,000 in years 2 and 3, $96,000 in years 4-6,
$100,800 in years 7-9, $105,840 in years 10-12 and $111,132 in years 13-15) with
an adjustment every three years for increases in the Consumer Price Index;
percentage rate based on gross sales in excess of certain benchmark amounts; and
a royalty on fuel sales based on sales in excess of certain benchmark amounts.
The Sublease and Fuel Service Agreement are also intended to be triple-net
leases under which RVC is responsible for maintenance, taxes and insurance.
River Port LLC also assigned to RVC the option to purchase the leased premises
which River Port LLC has under the lease agreement with Lessor. 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 of the convenience store was completed in January
1999. The video poker casino is in the final design and permitting phase and
construction is expected to commence during the second quarter of 1999, with
completion targeted for the end of the third quarter of 1999. Effective July 17,
1998, River Port LLC borrowed $1,750,030 from Cottonport Bank (the "Bank") for
purposes of funding construction of the truck stop and video poker casino to be
owned and operated by River Port LLC. This note bears interest at an annual rate
of 10.25% until December 10, 1999, 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.
Gaming Industry Restrictions on Stock Ownership
Upon the effective date of the Merger with OM, the Company's Certificate of
Incorporation was amended to adopt various restrictions on ownership of the
common and preferred stock of the Company in order to comply with applicable
gaming statutes. Persons who are not suitable to be stockholders of the Company
under such statutes may not own common or preferred stock of the Company.
Further, any stockholder may be required, at such stockholder's expense, to make
filings with applicable gaming authorities to determine suitability, and if
found not suitable will be required to dispose of such stockholder's stock and
will not be entitled to vote or receive distributions pending such disposal.
These restrictions are further described, below, under the caption entitled
"Restrictions on Stockholders; Mandatory Disposition if Found Unsuitable".
Operation of Truck Stop Facilities
The Company presently operates the truck stop facilities (i.e. the fuel
pumps, convenience store and restaurant) at The Gold Rush truck stop located in
Opelousas, Louisiana, Operator operates the truck stop facility at the Pelican
Palace, located in Toomey, Louisiana and operated the truck stop facility at
King's Lucky Lady, located in Port Barre, Louisiana until April 1, 1999, and
River Port LLC will be responsible for operating the truck stop facility at Port
Allen, Louisiana, when construction is completed, but has entered into the
Sublease and Fuel Services Agreement with RVC who will be responsible for day-
to-day operations of the River Port truck stop facility. The Company owns the
facility in Opelousas; Operator operates the facility in Toomey pursuant to a
long term contract with the owner of the truck stop; and River Port operates the
facility in Port Allen pursuant to a long term lease with the owner of the land.
These facilities and the agreements with the owners, as well as the agreements
with RVC, are described below.
The Gold Rush - Opelousas, Louisiana. The Gold Rush truck stop is located
in Opelousas, St. Landry Parish, Louisiana, a town with a population of
approximately 19,273 located at the intersection of Interstate Highway 49 and
U.S. Highway 167, approximately 20 miles from Lafayette, Louisiana. The Gold
Rush truck stop facility
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opened for business on February 17, 1993, and the video poker casino opened for
business on the same date. The Gold Rush has 31 fuel dispensers, an
approximately 4,234 square foot convenience store and a restaurant. At December
31, 1998, the Company employed 27 persons in the truck stop operations. The
Company has granted Operator a license to handle all sales of alcoholic
beverages at the convenience store and restaurant.
King's Lucky Lady - Port Barre, Louisiana. King's Lucky Lady truck stop
is in Port Barre, Louisiana, a town with a population of approximately 2,150
located five miles east of Opelousas, on U.S. Highway 190. King's Lucky Lady
has 16 fuel dispensers, an approximately 800 square foot convenience store and a
restaurant. As of April 1, 1999, the Company and Operator will no longer
operate King's Lucky Lady truck stop as a result of settlement of litigation
involving this truck stop. See "Item 3 -- Legal Proceedings" for a discussion
of this litigation and the settlement. Prior to such litigation, the Company,
as successor in merger to OM, had operated the King's Lucky Lady Truck Stop
pursuant to the Commercial Lease dated April 18, 1992 with T.B. Guillory, Inc.
("Guillory"), a nonaffiliated corporation that owns the facility. The lease was
for an initial term of five years (commencing May 1, 1992), and the Company had
the option to renew it for three additional five year terms, subject to the
parties negotiating a percentage rental for the renewal period acceptable to
both parties. The parties were unable to negotiate an acceptable renewal
percentage rental before May 1, 1997, and Guillory delivered notice to Operator
that the lease terminated effective April 30, 1997 and that Operator no longer
had any right to operate the video poker casino after such date. Litigation was
commenced between Guillory and the Company and Operator for a determination
whether the lease was terminated or whether the Company and Operator had the
right to extend the lease. As discussed in "Item 3 -- Legal Proceedings",
Guillory prevailed in the litigation and the Company will no longer operate this
truck stop facility effective April 1, 1999.
Pelican Palace - Toomey, Louisiana. The Pelican Palace truck stop is in
Toomey, Louisiana, a town with a population under 1,000 located three miles east
of the Texas state line on Interstate 10, approximately three miles from Vinton,
Louisiana (population approximately 3,150). The Company, as successor in merger
to OM, entered into an Operating and Financing Agreement on July 21, 1993 (as
amended March 17, 1995) with Curray Corporation ("Curray"), a nonaffiliate
corporation that owns the land on which the Pelican Palace now stands, pursuant
to which the Company agreed to furnish the financing for, and to build, operate
and manage, a truck stop facility and video poker casino. The Company agreed to
expend up to approximately $1,450,000 constructing and equipping the truck stop
and video poker casino, all of which had been expended at December 1, 1995, and
Curray pledged all such improvements and equipment to the Company as collateral
for a first lien mortgage note in the amount of $1,450,000. The Company also
agreed to purchase 50 video poker machines to be used in the casino, at a cost
of approximately $282,000. Construction was substantially completed in March
1994. The truck stop facility opened for business in March 1994 and the video
poker casino opened for business on March 30, 1994. During 1996, certain
renovations to the truck stop and parking lot were completed, which were funded
out of cash flow. The Pelican Palace has 14 fuel dispensers, an approximately
1,200 square foot convenience store and a restaurant. Pursuant to the Operating
and Financing Agreement, the Company has the right and the obligation to operate
and manage both the truck stop facility and the video poker casino for an
initial term of five years (commencing March 30, 1994) and the Company has the
option to renew it for three additional five year terms on the same terms as the
original five year period; and the Company is presently in the first five-year
renewal term. However, on October 19, 1995, the Company and Curray agreed to
co-management of the Pelican Palace whereby the Company and Operator serve as
the operator of the video poker casino, restaurant and beverage facilities, with
Curray assuming the role of landlord, pursuant to which Curray assumes all
responsibility for property maintenance. Under the Operating and Financing
Agreement, the net income from operation of the truck stop facility and the
video poker casino was allocated 70% to the Company to repay the first lien
mortgage, and the remaining 30% was split equally between the Company and
Curray, until the mortgage was paid. After the mortgage was paid on May 31,
1996, the net income from operations is split 50% to the Company and 50% to
Curray. However, the Company has agreed to pay from its share of net income an
amount equal to 2% of the net revenues generated from the video poker machines
to a nonaffiliate party as a finder's fee in connection with the Pelican Palace
acquisition. The Company has entered into a subcontract with a nonaffiliate
corporation to manage and operate the fuel pump operations and convenience store
in return for a monthly payment to the Company of $2,500, plus a percentage of
all fuel sales and a percentage of merchandise sales over $500,000.
Consequently, the Company will not employ on site personnel to manage these
operations. The Company will, however, remain primarily responsible for
management of such operations. Therefore, the Company is not required to obtain
Curray's consent to this subcontract. Curray consented to the contribution and
assignment of the operation of the video poker casino to Operator. At December
31, 1998, the Company was operating the restaurant at the Pelican Palace and
employed 17 persons for such operations. The Company has granted Operator a
license to handle all sales of alcoholic beverages at the convenience store and
restaurant. Pursuant to the Settlement Agreement,
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Operator will be responsible for management of the truck stop facility
commencing March 31, 1999, subject to the existing subcontract.
River Port Truck Stop - Port Allen, Louisiana. The River Port Truck Stop
is in Port Allen, Louisiana, a town with a population of approximately 30,000
located approximately 6 miles West of Baton Rouge on Highway 415. The River Port
truck stop has nine fuel dispensers, and an approximately 4,710 square foot
restaurant/convenience store. River Port LLC finished construction of the
convenience store, fuel facility and restaurant on January 2, 1999, and entered
into the Sublease and Fuel Service Agreement with RVC on January 10, 1999. The
Sublease and Fuel Service Agreement are discussed in further detail under
"Development of River Port Truck Stop", above. Pursuant to the Sublease, RVC is
responsible for operating the convenience store and restaurant and pursuant to
the Fuel Service Agreement, RVC is responsible for the day-to-day sale of fuel
at the truck stop and maintenance of the truck parking lot and truckers' lounge
facilities. River Port LLC occupies the premises pursuant to a lease with a
term of 50 years, commencing January 1997, and pays a monthly base rent of
$7,000 plus Additional Rent of 10% of Net Revenues as defined in the Lease
Agreement, provided that during the first twenty-four months after commencement
of video poker operations, the Additional Rent will be 5% (rather than 10%). As
a result of the Sublease and Fuel Service Agreement, River Port LLC will not
employ onsite personnel to manage the truck stop, convenience store, restaurant
or fuel facility, but will remain primarily responsible for management of such
operations under the Lease Agreement.
Assignment to OM Operating, L.L.C.
Louisiana law requires a device operator's license in order to own and
operate truck stop video poker devices, and further requires that a licensed
device owner and operator be at least majority owned by Louisiana residents.
See "Regulation and Licensing", below. Following the Merger, there could be no
assurance that the Company would be majority owned by Louisiana residents, and
if not, then OM would not be deemed majority owned by Louisiana residents and
would lose its device operator's license to operate and manage the five truck
stop video poker casinos. Consequently, on the effective date of the Merger with
OM, OM contributed and assigned to Operator all of its rights, duties and
obligations to operate the five existing video poker casinos and the tavern
route, and Operator became the licensed device operator. Operator is a
Louisiana limited liability company organized by OM and Williams, a former
director and Vice President of OM. Effective March 31, 1999, Operator will be
owned 51% by Williams, 24.5% by the Company and 24.5% by one or more members of
the North Louisiana Group, and will exist until the earlier of December 31, 2050
or the date that Operator no longer owns or operates any video poker devices.
See "Restructure of OM Operating, L.L.C.", above, for a further discussion of
Operator.
In addition to contributing and assigning the right to operate the video
poker casino and tavern route operations to Operator, OM contributed and
assigned all of its interest in 259 video poker devices and related operating
assets, subject to approximately $861,098 of debt (as of the effective date of
the Merger with OM) which Operator agreed to pay. In each of 1995 and 1996, the
Company contributed and assigned an additional 50 devices and related operating
assets subject to approximately $91,100 and $96,050 of debt, respectively, with
respect to the Company's acquisition of Ozdon Investments, Inc. and the sublease
with New Orleans Video Poker, Inc., and funded approximately $44,300 and $7,400
in leasehold improvements during 1998 and 1997, respectively. Operator is
responsible for all operational costs and expenses of the video poker casinos
and the tavern route, including labor, maintenance, repair and its share of the
rental or other percentage fees payable to the owners of the truck stop
facilities in which the casinos are located pursuant to the contracts between
the Company and such owners, the casino operations portion of which have been
assigned by the Company to Operator.
License Renewal Process
As further discussed under "Regulation and Licensing", below, the Louisiana
Gaming Control Board ("Gaming Control Board") has undertaken a review of all
licensees operating video poker casinos, including the Operator. The Company
has had preliminary meetings with the State Police, which is conducting the
initial reviews for the Gaming Control Board, concerning the structure of
Operator described above and whether such structure satisfies the Louisiana
residency requirements necessary for a license to operate video poker casinos,
and has made various modifications to its structure in an attempt to satisfy
certain concerns raised by the State Police. The Company believes its modified
structure satisfies the residency requirements, but the State Police has not
completed its examination or made any conclusion or recommendation to the Gaming
Control Board whether it disagrees or concurs. If the State Police concludes
that the modified structure of Operator does not satisfy the Louisiana residency
requirements, it will forward its conclusion to the Gaming Control Board and the
Company and Operator will be
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entitled to a hearing before the Gaming Control Board. In such event, it is
possible that the Company and Operator would be required to further restructure
Operator, which could, depending on the nature of any such further restructure,
result in material adverse changes to the Company's ownership interest in, and
revenues received from, Operator, which in turn could have a material adverse
effect on the Company's financial condition. It is also possible that the Gaming
Control Board would not allow the Company and Operator an opportunity to further
restructure Operator, and instead revoke Operator's license, although the
Company does not presently believe the Gaming Control Board will take such
action. The revocation of Operator's license would have a material adverse
effect on the Company's business operations and financial condition.
Operation of Video Poker Casinos
Under Louisiana law, a licensed truck stop facility covering at least five
contiguous acres which has overnight facilities, a restaurant and service
facilities for 18 wheel tractor-trailers may segregate an area of the facility
as the video poker casino for adult patronage only and place up to 50 video
poker devices for play in the casino area; while racetracks and off track
betting ("OTB") parlors are permitted to install an unlimited number of video
poker devices, and qualifying locations with liquor licenses ("taverns") are
limited to three such devices. As of April 1, 1999, Operator operates the video
poker casinos in four truck stops in Louisiana (and until April 1, 1999,
operated a fifth video poker casino in Louisiana) and handles all sales of
alcoholic beverages at the convenience store and restaurant in two of such truck
stops, and effective as of April 1, 1999 will operate the truck stop facilities
at one of such truck stops. See "Operation of Truck Stop Facilities", above.
At December 31, 1998, Operator employed approximately 90 persons in connection
with its casino operations. The truck stops in which these video poker casinos
are operated by Operator are located in Opelousas, Toomey, Vinton, and New
Orleans, Louisiana; and, until April 1, 1999, Operator operated a video poker
casino in Port Barre, Louisiana. Operator generally operates these video poker
casinos pursuant to long term contracts with the owners of the truck stop. Upon
completion of the River Port Truck Stop, River Port LLC will operate the video
poker casino at such facility located in Port Allen, Louisiana. River Port LLC
will also operate its video poker casino pursuant to a long term contract with
the owner of the truck stop. These casinos and the agreements with the owners
are described below. See, also, "Regulation and Licensing -- Louisiana --
Recent Changes in Louisiana Act", below, for a discussion of recent changes to
Louisiana law regarding operation of truck stop video poker casinos.
The Gold Rush - Opelousas, Louisiana. The Gold Rush is also described
above under "Operation of Truck Stop Facilities". The video poker casino and
lounge at the Gold Rush contains approximately 1,752 square feet and 50 video
poker devices. Operator's right to operate the casino and lounge is granted
pursuant to a license from the Company which may be terminated by either the
Company or Operator upon 60 days' prior written notice to the other party. A
non-affiliate of the Company is entitled to a revenue participation interest of
10% of the gaming profits (total cash played in the machines less winnings paid
out and less all franchise, licensing and device fees paid to the State of
Louisiana or any other political subdivision) from the operations of the video
poker casino. There are two other truck stops operating a total of
approximately 85 video poker devices within 20 miles of the Gold Rush, a race
track operating approximately 60 video poker devices within 18 miles, and a
Native American gaming casino approximately 35 miles from the Gold Rush. Of the
two other truck stops with video poker casinos, one is the King's Lucky Lady
video poker casino. See "Marketing and Competition", below. Operator employed
18 persons at the Gold Rush at December 31, 1998.
King's Lucky Lady - Port Barre, Louisiana. King's Lucky Lady is also
described above under "Operation of Truck Stop Facilities". Until April 1,
1999, Operator operated the video poker casino at King's Lucky Lady, but will no
longer operate such video poker casino effective as of that date. Operator
employed 21 persons at King's Lucky Lady at December 31, 1998. See the
discussion of King's Lucky Lady, above, under "Operation of Truck Stop Facility"
for a discussion of the Company's loss of the right to operate the video poker
casino at King's Lucky Lady.
Pelican Palace - Toomey, Louisiana. The Pelican Palace is also described
above under "Operation of Truck Stop Facilities". The video poker casino and
lounge at the Pelican Palace contains approximately 2,200 square feet and 50
video poker devices. Operator's right to operate the casino and lounge is
granted pursuant to the Operating and Financing Agreement previously discussed.
There are eight other truck stops operating a total of approximately 370 video
poker devices, and a race track operating approximately 350 video poker devices,
within 20 miles of the Pelican Palace. The Lucky Longhorn, one of these truck
stops, is also operated by Operator and is located across Interstate 10.
Additionally, there is a Native American gaming casino operating approximately
40 miles from the Pelican Palace, and four riverboat casinos operating within
approximately 25 miles. See "Marketing and Competition," below. Operator
employed 18 persons at the Pelican Palace at December 31, 1998.
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Lucky Longhorn - Vinton, Louisiana. The Lucky Longhorn video poker casino
contains approximately 3,000 square feet and 50 video poker devices within the
Lucky Longhorn truck stop in Vinton, Louisiana, across Interstate 10 from the
Pelican Palace. Operator operates the video poker casino pursuant to an Act of
Contract and Agreement dated June 5, 1992 with three nonaffiliated corporations
and two nonaffiliated individuals who own the truck stop (referred to
collectively as "Longhorn") which was assigned to Operator by OM. Pursuant to
the Act of Contract and Agreement, as modified, the Company, as successor in
merger to OM, agreed to provide Longhorn financing of $800,000 to renovate the
Lucky Longhorn. This financing was provided by the Company arranging an
$800,000 bank loan to Longhorn, which was guaranteed by the Company. At
December 31, 1995, this loan had been repaid. Operator has the exclusive right
to place and operate video poker devices in the Lucky Longhorn for a period of
10 years (commencing August 2, 1992). Operator and Longhorn split 50%/50% the
net revenues generated from operation of the video poker devices; net revenues
being defined as all money played in the devices less winnings paid out and the
22.5% (32.5% after July 1, 1994) net device revenue tax payable to the state.
Operator is solely responsible from its share of the revenues for paying all
other costs and expenses related to the video poker casino, with the exception
of contracted security. Operator employed 16 persons at the Lucky Longhorn at
December 31, 1998. Operator has assumed all of the Company's responsibilities
under the Act of Contract and Agreement. Longhorn has consented to the
assignment by the Company and Operator.
There are eight other truck stops operating a total of approximately 370
video poker devices, and a race track operating approximately 350 video poker
devices, within 20 miles of the Lucky Longhorn. Additionally, there is a Native
American gaming casino operating approximately 40 miles from the Lucky Longhorn,
and four riverboat casinos operating within approximately 25 miles. See
"Marketing and Competition", below.
The Diamond Jubilee - New Orleans, Louisiana. The Diamond Jubilee video
poker casino contains approximately 2,700 square feet and 35 video poker devices
(50 devices prior to February 1, 1997, 40 devices from February 1, 1997 through
August 16, 1998 and 35 devices from August 17, 1998 through the date of filing
of this Form 10-KSB) within The Diamond Jubilee truck stop in east New Orleans,
Louisiana. Operator operates the video poker casino pursuant to a Sublease
Agreement (the "Casino Sublease") dated July 1, 1996 between Operator and New
Orleans Video Poker, Inc. ("NOVP"), a Louisiana corporation 50.1% owned by
Donald I. Williams and his spouse and 29.5% owned by nine other stockholders of
the Company. NOVP leases the truck stop operations and the video poker casino
from Stanley Doussan ("Doussan") pursuant to a Lease Agreement, Addendum to
Lease and Sublease and Operator's Agreement dated July 10, 1992, as amended by
an Amendment to Lease and Addendum to Lease dated December 15, 1992
(collectively, the "Operator's Agreements"). The Operator's Agreements give
NOVP the right to lease and operate the truck stop and video poker casino for a
period of 10 years (commencing January 1, 1993). NOVP is required to pay rent
to Doussan equal to 50% of the net receipts from the video poker devices (except
for the first three years Doussan agreed to reduce it to 40% unless NOVP
recouped $300,000 of its construction costs prior to the end of such three year
period). Net receipts are defined to mean all money played in the devices less
winnings paid out and any tax or franchise fee payable to the state. NOVP is
also required to pay an escalating fixed monthly rental, which is currently
$5,063 per month. Under the terms of the Casino Sublease, which was consented
to by Doussan, Operator leases the video poker casino, bar, related parking area
and one gasoline pump for a term of one year, subject to automatic renewal for
successive one year periods at Operator's sole discretion, with a maximum of 30
one year renewals, provided NOVP can terminate the Casino Sublease at any time
if the sublease payments to it fall below $5,000 per month for five consecutive
months after payment by Operator of various indebtedness assumed by it. Since
August 1998, cash flows have not been sufficient to generate the minimum
sublease payments and, therefore, NOVP can terminate the Casino Sublease at any
time. Operator agreed to pay rent to NOVP during the term of the Casino
Sublease equal to 50% of the net operating cash flow of Operator from operations
of the casino, after deducting all costs and expenses of operations, interest
and principal on indebtedness for furniture, fixture or equipment and a
reasonable reserve. Operator assumed approximately $96,050 of indebtedness of
NOVP as the purchase price for 50 video poker devices and an automated teller
machine. Operator also has an option to sublease the truck stop and fuel
operations and restaurant and purchase NOVP's 50% share of net operating cash
flow. The Company also issued 450,000 shares of Common Stock to NOVP as partial
consideration for NOVP entering into the Casino Sublease, and granted piggy-back
and demand registration rights to NOVP which expired July 1, 1998. Operator
employed 14 persons at The Diamond Jubilee at December 31, 1998.
On August 4, 1998, Operator and NOVP agreed to purchase a Net Commercial
Lease Agreement ("Commercial Lease") from F&F Enterprises ("F&F"), the previous
operator of the truck stop and related fuel operations and the restaurant, for
the sum of $100,000 cash and the execution of a $30,000 promissory note. The
Commercial Lease provided for the operation of the truck stop, restaurant and
fuel operations at The Diamond Jubilee. Due to continued reductions in fuel
sales, The Diamond Jubilee Casino was in jeopardy of failing to qualify
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as a truck stop under Louisiana regulations. As part of the purchase of the
Commercial Lease, Operator and NOVP settled all obligations to F&F regarding
operating losses (restaurant and fuel facilities), unpaid subsidies and unpaid
rents by Operator and NOVP through August 1, 1998. Doussan loaned Operator
$85,000 for this purchase which was repaid during the third quarter of 1998. In
addition, Doussan agreed to a Modification of Lease providing for a reduction in
the profit sharing payments due Doussan for a period of nine weeks during the
third quarter. The amount of these reductions totaled $85,000. In addition,
Operator has withheld an amount equal to $25,000 from NOVP's profit sharing
amounts as an additional contribution toward the purchase of the Commercial
Lease. Pursuant to an agreement dated May 15, 1998 between Operator and NOVP,
the parties agreed that the fuel operations at The Diamond Jubilee, previously
operated by F&F, would be managed by Operator. This agreement provides for the
monthly gasoline net proceeds (sales less fuel costs) to be remitted to NOVP. In
return, NOVP agrees to pay to Operator a base amount of $3,000 per month for
management of the fuel facilities plus an additional $600/month for each
increment of 10,000 gallons/month of fuel sales over 50,000/gallons per month.
There are six other truck stops operating a total of approximately 190
video poker devices, and a river boat casino, within 12 miles of The Diamond
Jubilee. See "Marketing and Competition", below. At December 31, 1996, The
Diamond Jubilee did not have sufficient fuel sales necessary to operate 50 video
poker devices under Louisiana regulations, and as of February 1, 1997 the
Company was required to remove 10 devices from operations until increased fuel
sales are maintained. Further, fuel sales dropped below 75,000 gallons per month
during the first quarter of 1998, which will result in the removal of an
additional five devices from operations during the second quarter of 1998 until
increased fuel sales are maintained. In order to increase fuel sales, the
Company will be required to make a substantial investment involving fuel storage
tanks and additional gasoline pumps. The Company is presently negotiating with
NOVP and Doussan to share such costs if any such improvements are desired.
There can be no assurance that such improvements will be made and, if not made,
it is not likely that the fuel sales will increase to a level to allow
reinstallation of all 15 devices.
River Port - Port Allen, Louisiana. River Port is also described above
under "Operation of Truck Stop Facilities." On January 17, 1997, a wholly owned
subsidiary of the Company entered into a Lease Agreement with S.W. Day and T.
Joe Calloway, two nonaffiliated individuals, to lease undeveloped land for a
term of 50 years and to construct on it a truck stop and video poker casino.
The Company assigned the Lease Agreement to River Port LLC on May 19, 1998.
River Port LLC plans to build an approximately 3,500 square foot video poker
casino and bar and recently completed an approximately 4,710 square foot
restaurant/convenience store on the land at an approximate cost of $2,000,000
(including equipment) which River Port LLC expects to fund partially through
long-term indebtedness borrowed from Cottonport Bank of approximately
$1,750,030, with the remainder being funded by an increase in the indebtedness
to Cottonport Bank upon resolution of the litigation relating to King's Lucky
Lady. The Lease Agreement provides for payment of a base rent of $7,000 per
month, commencing on the earlier of commencement of construction or June 30,
1997, and additional rent equal to 10% of the net revenues generated from video
poker operations; net revenues meaning all money played in the devices less
winnings paid out and all franchise fees, device fees and other taxes payable to
the state or any other governmental agency, other than federal or state income
taxes. River Port LLC anticipates that the video poker casino will open for
business at the end of the third quarter of 1999. It will initially have 50
video poker devices, and River Port LLC anticipates that it will employ
approximately 15-20 persons in connection with the operations of the video poker
casino.
Video Poker Tavern Route
Operator also operated nine video poker devices in four third-party taverns
as of December 31, 1998 through a subcontract with a nonaffiliated which
provides that Operator is entitled to 50% of the net revenues payable to the
subcontractor generated from the devices, and the subcontractor and Operator
split certain costs of operations on an agreed basis. OM assigned this
subcontract to Operator and the subcontractor has consented to this assignment.
Cruise Franchise and Travel Operations
GalaxSea offers two types of franchises for sale. The first is for the
establishment and start-up of a new cruise travel store that sells cruises and
tours exclusively (a "Start-up"). The second is for full service retail travel
agencies which allow such stores and agencies to, respectively, convert to (a
"Conversion") or add on (an "Add-on") GalaxSea travel vacation stores.
Regardless of the type of franchise, each GalaxSea store is expected to closely
adhere to the GalaxSea system which focuses on creating a retail environment and
attitude and to participate in the national, regional and local marketing
promotions that GalaxSea provides for its franchisees. As of December 31, 1998,
GalaxSea had 70 franchises in its system. GalaxSea receives a franchise fee for
each franchise sold. The franchise
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fee for a Start-up is presently $25,000. The franchise fee for a Conversion/Add-
on is presently $5,000 subject to a discount based on existing cruise sales
volume. Each franchisee pays a monthly license fee rather than a royalty
percentage based on that agency's annual cruise sales volume. The maximum
monthly license for any GalaxSea agency is presently $750. In addition to
franchise fees and monthly license fees, GalaxSea has contracts with most major
cruise lines which provide for GalaxSea to receive override payments based on
the cruise sales of all GalaxSea franchisees. The contracts also generally
provide for favorable commission structures for the franchisees.
Marketing and Competition
Marketing. Gaming Operations. Operator markets its video poker casinos
through limited newspaper and radio advertising, and from word of mouth
referrals. Customers are drawn primarily from the local population and
surrounding area, except for the properties on the Texas state line which draw
largely from residents of Texas, which does not have video poker gaming.
Cruise and Travel Operations. GalaxSea markets its franchise sales through
its extensive contacts in the travel industry. It also promotes its franchise
system through national, regional and local advertising campaigns through the
print, radio and television media, and through direct mail advertising
campaigns, and the franchisees are required to contribute to the cost of such
advertising. As part of the acquisition of GalaxSea by the Company, GalaxSea
and International entered into a long-term joint marketing agreement, pursuant
to which GalaxSea will have access to market its Add-on franchises to
International's network of approximately 900 travel agency locations.
I.T. Cruise markets directly to the various cruise lines through personal
relationships and direct contact, and deals with International's network of
travel agency locations in the same manner.
Competition. Gaming Operations. The gaming industry is highly
fragmented and characterized by a high degree of competition among a large
number of participants, including riverboat casinos, dockside casinos, land-
based casinos, video lottery terminals, video poker devices, Native American
gaming ventures and other forms of legalized gaming in the United States. Many
of the Company's competitors and potential competitors have significantly
greater experience and financial resources than the Company. The Company
believes that competition in the gaming industry is based on the quality and
location of gaming facilities, the effectiveness of marketing efforts and
customer service and satisfaction. The Company's truck stops casinos are
subject to extensive competition from other truck stops and taverns located
within its market area for each truck stop, and from Louisiana's racetracks and
OTB parlors which may install an unlimited number of video poker devices. As of
December 31, 1998, there were over 15,000 video poker devices in operation in
Louisiana. Most are one to three devices located in taverns. As of such date,
there were approximately 100 licensed truck stops with approximately 3,500
devices in the aggregate. Each truck stop is permitted to have up to 50 video
poker devices and each tavern is permitted to have up to three video poker
devices. In addition, Louisiana has authorized riverboat gaming, and one land-
based casino located in New Orleans (which is presently involved in bankruptcy
reorganization proceedings). Twelve riverboats were in operation at December
31, 1998, four in Lake Charles (approximately 23 miles from the Company's Lucky
Longhorn and Pelican Palace), three in New Orleans (over 100 miles from any of
the Company's truck stop casinos, except The Diamond Jubilee, which is in New
Orleans), two in Bossier City (over 100 miles from any of the Company's truck
stop casinos), one in Shreveport (over 100 miles from any of the Company's truck
stop casinos), and two in Baton Rouge (over 40 miles from any of the Company's
truck stop casinos). At December 31, 1998, there were three Native American
casinos in operation in Louisiana, one in Kinder, one in Marksville and one in
Charentan. The riverboats and land-based casinos are permitted to have table
games, slot machines and video poker devices. It is anticipated that the
riverboats and the casinos will focus their marketing efforts on the tourist
market. Although the Company has focused its marketing efforts primarily on
local residents, such other gaming operations will provide substantial
competition.
The adjacent state of Mississippi has also legalized dockside gaming.
Dockside gaming in Mississippi, riverboat casinos in Louisiana and the land-
based casino in New Orleans have or are anticipated to have a wide variety of
gaming devices and table games, while Louisiana law limits the Company's
operations to video poker devices. Further, Louisiana law limits the jackpot
that may be paid by a video poker device to $500 per play while other gaming
activities have no such limit. The Company believes the limit to be a
competitive disadvantage.
The operation of truck stop video poker casinos is a highly competitive
business. The principal competitive factors in the industry include the quality
and location of the facility, the nature and quality of the amenities, customer
services offered, and the implementation and success of marketing programs. The
Company believes it competes effectively with other truck stops and taverns in
its market in these areas.
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There has been a moderate increase during the last two years in the number
of gaming establishments opening for operation in Louisiana and Mississippi, and
competition for the business of gaming patrons has become very intense. As a
result, it is expected that the profit margins which may be expected by gaming
establishments like the Company will be adversely affected, and that various
gaming establishments may be forced to close because they cannot compete
effectively at such reduced margins. The Company believes it will be able to
maintain a competitive position by carefully managing expenses and cash flow,
but there can be no assurance.
Cruise and Travel Operations. GalaxSea experiences competition for the
sale of its franchised cruise retail travel agencies from various national and
regional franchise operators and cruise only consortia, many of which have
significantly greater experience and financial resources than GalaxSea. I.T.
Cruise experiences competition in its direct dealings with cruise lines from
other travel agency groups and travel suppliers, many of which also have
significantly greater experience and financial resources than I.T. Cruise.
Vigorous competition is encountered in the travel business from more than
30,000 travel agents and direct sales by airlines and travel suppliers in the
U.S. and abroad. This competition is mainly based on service, convenience and
proximity to the customer and has increased due to several factors in recent
years, including the fact that a number of independent agencies have been
acquired by larger travel companies. Travel agency groups also have increased
in size, enabling independent agencies to be more competitive in providing
travel services. Recently, the airlines have placed limits on commissions paid
to travel agents for airline tickets, which has caused some independent agents
to go out of business. GalaxSea's franchisees are encouraged, and in some cases
required, only to book cruise and tour business, which results in the franchisee
generally earning larger commission than it would from airlines. GalaxSea
believes this will enable it to increase its number of Start-up and Add-on
franchises, although there can be no assurance in this regard. GalaxSea also
believes that its joint marketing agreement with International will enable it to
attract a certain number of agencies affiliated with International to buy Add-on
franchises. During 1998, five agencies bought Add-on franchises.
Employees
As of December 31, 1998, the Company employed 97 persons full time and part
time, including four administrative personnel, with the remainder involved in
on-site operation of the Gold Rush, King's Lucky Lady, Pelican Palace and The
Diamond Jubilee truck stops. As of December 31, 1998, Operator employed 94
persons full and part time, including one executive and one managerial
personnel, with the remainder involved in on-site operation of the five truck
stop casinos. None of the Company's or Operator's current employees are covered
by any collective bargaining agreements. The Company considers its employee
relations and those of Operator to be good.
GalaxSea presently has three employees. I.T. Cruise presently has no
employees. Several employees of International also perform duties for GalaxSea
and I.T. Cruise, and the Company reimburses International for their services.
Environmental Matters
A number of jurisdictions have adopted laws and regulations relating to
environmental controls and the development and operation of various projects.
The Company is responsible for complying with various federal and state waste
disposal and licensing laws in connection with the truck stop facilities it
operates, including the requirement of obtaining permits for underground storage
tanks for fuel products and the requirement of properly disposing of waste motor
oil and other regulated products. The Company has obtained all required
permits, and is not aware of any material violation of applicable environmental
regulations with respect to its truck stop operations. There have been no
changes to the Company's operations and no reserves have been established for
any environmental hazards with respect to its truck stop operations.
Environmental contingencies are not expected to have a material adverse effect
on future results of operations or financial condition.
Regulation and Licensing - Gaming Operations
Louisiana
Device Owner's License. The manufacture, distribution, servicing and
operation of video draw poker gaming devices ("Devices") in Louisiana is subject
to the Louisiana Gaming Control Law and the Louisiana Video Draw Poker Devices
Control Law and the Rules and Regulations promulgated thereunder (the "Louisiana
Act"). Licensing
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<PAGE>
and regulatory control is provided by the Louisiana Gaming Control Board (the
"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"). The laws and regulations of the Gaming Control
Board and the Division are based upon a primary consideration of maintaining the
health, welfare and safety of the general public and upon a policy which is
concerned with protecting the video gaming industry from elements of organized
crime, illegal gambling activities and other harmful elements, and protection of
the public from illegal and unscrupulous gaming to ensure the fair play of video
gaming Devices. The Louisiana Act was amended in 1994 to further qualify and
restrict video gaming operations in truck stops. See "Recent Changes in
Louisiana Act", below.
Operator, an indirect operating subsidiary of the Company which operates
the existing truck stop casinos, has been granted a license as a Device owner by
the Division, and River Port LLC will apply for a license as a Device owner
prior to opening of the River Port video poker casino. Under the terms of the
Louisiana Act, licenses expire at midnight on June 30 of each year and must be
renewed annually through payment of certain fees and continued compliance with
the suitability requirements of the Louisiana Act. All license fees must be
paid on or before May 15 in each year licenses are renewable. Operator has
timely submitted its renewal applications, but there is a backlog existing at
the Division and the Division is behind in reviewing applications, including the
application of Operator. See, also, "License Renewal Process", above, for a
discussion of the renewal examination to which the Company is presently subject
and the possible results thereof if the Operator is found not to meet the
residency requirements.
The Gaming Control Board may deny, impose a condition or fine, suspend or
revoke any license, renewal, or application for a license for violation of any
rules and regulations of the Gaming Control Board or Division or any violations
of the Louisiana Act. Fines for violations of gaming laws or regulations may be
levied against the licensees and the persons involved. In addition, the
licensees could be subject to separate fines for each violation of the gaming
laws. The Louisiana Act states that a license issued by the Gaming Control
Board is a pure and absolute privilege. The issuance, condition, denial,
suspension or revocation of a license is at the discretion of the Gaming Control
Board in accordance with the provisions of the Louisiana Act. A license is not
property or a protected interest under the constitution of either the United
States or the State of Louisiana. Suspension or revocation of the license of
Operator or River Port LLC could have a material adverse effect upon the
business of the Company.
The Gaming Control Board has the authority to conduct overt and covert
investigations of any person, entity, applicant or participant involved directly
or indirectly in the video gaming industry in Louisiana. This investigation may
extend beyond the information provided in the formal application, including
information with regard to the licensee's immediate family and relatives and
their affiliations with certain groups, organizations, corporations, firms or
other business entities. The investigation may also extend to every person who
has or controls more than a 5% ownership, income or profit interest in an entity
which applies for a license in accordance with the Louisiana Act, or who is a
key employee or who has the ability to exercise significant influence over the
licensee. All persons or entities investigated must meet all suitability
requirements and qualifications for a licensee. The Gaming Control Board may
deny an application for licensing or renewal of a license for any cause which it
may deem reasonable. The applicant for licensing must pay a filing fee which
also covers the cost of investigation.
In order for a corporation or limited liability company like Operator or
River Port LLC to be licensed by the Gaming Control Board, it must be
demonstrated that a majority of the corporation or limited liability company is
owned by persons who have been domiciled in Louisiana for a period of at least
two years prior to the date of the application. See "License Renewal Process",
above, for a discussion of the renewal examination to which the Company is
presently subject and the possible results thereof if the Operator is found not
to meet the residency requirements.
Devices must meet strict specifications established by the Gaming Control
Board. The number of Devices is limited depending on the type of location at
which the Devices are located. Fees payable to the Gaming Control Board include
an application fee, which is non-refundable, an annual fee, based upon a
percentage of the net revenues from the operation of each Device, a Device
owner's fee, a Device operations fee, license establishment fee and a Device
owner's franchise fee. All fees are payable in either semi-monthly, quarterly
or annual installments depending on the fee being paid.
According to the regulations adopted by the Gaming Control Board, the
annual gross revenues generated from the video poker operations of a facility
may not exceed its annual gross revenues from its primary business operations.
The Company was not in compliance with this regulation for its fiscal years
ended 1998, 1997 and 1996. However, this regulation was not being enforced in
1998, 1997 and 1996. The Louisiana Act was recently amended, as
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<PAGE>
discussed below under "Recent Changes in Louisiana Act", to further qualify and
restrict video gaming operations in truck stops. However, as amended, the
Louisiana Act still does not contain a provision similar to this regulation. The
Gaming Control Board has informally indicated that it does not currently plan to
enforce any of its regulations that are not based on express statutory
provisions. Since the legislature further qualified and restricted truck stop
video poker operations, but did not choose to include a restriction of this
type, the Company presently anticipates that the Gaming Control Board will
continue to choose not to enforce this regulation.
Establishment License. The Louisiana Act also provides that a truck stop
facility ("Establishment") must obtain a license as an Establishment to allow
the placement and operation of Devices within the Establishment. The
Establishment license is typically granted to the owner of the truck stop
facility, but may also be granted to a lessee of the facility. The owners are
the Establishment licensees for King's Lucky Lady, the Pelican Palace, The
Diamond Jubilee and the Lucky Longhorn and Stelly's. Ozdon is the establishment
licensee for the Gold Rush. River Port LLC is presently anticipated to be the
establishment licensee for River Port.
Establishment licenses are also subject to annual renewal at the same time
Device owner licenses are renewable, and the payment of an annual fee. The
Gaming Control Board has the same authority to deny, suspend, condition or
revoke an Establishment license, and to conduct investigations (including
investigations of 5% owners), as it does for Device owner licenses. As with the
Device owner license, the Establishment license is a pure and absolute
privilege. The loss by the Company (or Operator or River Port LLC) or the owner
of the truck stop of the Establishment license for any of the five truck stops
within which Operator operates, or River Port LLC will operate, video poker
casinos would have a material adverse effect upon the business of the Company.
The Louisiana Act also provides protection to lessees of truck stop
facilities such as the Company, Operator and River Port LLC. It provides that
if the lease of a licensed Establishment expires or is terminated without legal
cause by the owner of the Establishment, neither the owner nor any new lessee
shall have the right to apply for a Device license at the Establishment for six
years, unless the owner of the Establishment was also the holder of the Device
owner license for the devices being operated at the Establishment, and the
former lessee/licensee is given the right to continue operations at the
Establishment by agreement with the owner or any new lessee.
The Gaming Control Board has issued a directive to the Division to strictly
enforce the requirements of the Louisiana Act which require the Establishment
Licensee to be in control of the fuel operations at the truck stop. The
determination whether the Establishment Licensee has satisfied such control
requirements involves various subjective criteria and the determination is not
easily predictable. It is possible that the Gaming Control Board or the Division
could interpret these subjective criteria in such a manner to conclude that the
Establishment Licensee at one or more of the Company's truck stops was not in
compliance, in which case their Establishment license could be revoked, which
would also result in the Operator losing its ability to operate the video poker
truck stop casino at such truck stop. The Company is reviewing its present
arrangements with its various Establishment Licensees and the fuel operators at
the existing truck stops in an attempt to determine whether they are in
compliance or whether modifications need to be made to bring them into
compliance. There can be no assurance that the Gaming Control Board or the
Division might not have a different interpretation than the Company or
Establishment licensee with regard to the existing arrangements and their
compliance with the fuel operations control requirement.
Recent Changes in Louisiana Act. Effective July 1, 1994, the Louisiana
legislature adopted amendments to the Louisiana Act which have a material effect
on operations of truck stop casinos. The franchise payment payable to the State
of Louisiana was raised from 22.5% of net device revenues (money played in video
poker devices less winnings paid) to 32.5% and 26% of net device revenues for
those operated in truck stops and taverns, respectively.
In addition to raising the franchise payment, the Louisiana legislature
also adopted additional standards to be satisfied for a truck stop facility to
be considered a qualified truck stop facility for placement of video poker
devices. These standards include increasing the required parking area for 18-
wheel vehicles; requiring a 24-hour on-site restaurant facility; requiring
access to repair facilities; and requiring certain other amenities be available
for truck drivers. Under the new law, operators had until January 1, 1996 to
bring their truck stops into compliance with these new standards. As of
December 31, 1998, each of the five truck stops at which Operator operates truck
stop casinos satisfies these additional criteria.
The Louisiana legislature also adopted minimum fuel sales requirements for
qualified truck stops effective July 1, 1994, except that existing licensed
facilities had until January 1, 1996 to satisfy such requirements. The fuel
sales requirements and their relationship to the number of video poker devices
that may be operated at the truck stop
-15-
<PAGE>
are based on average monthly sales, as follows: (i) up to 50 devices if sales
equal at least 100,000 gallons per month and 40,000 of such gallons are diesel,
(ii) up to 40 devices if sales equal at least 75,000 gallons, but are less than
100,000 gallons, per month and 30,000 of such gallons are diesel, and (iii) up
to 35 devices if sales equal at least 50,000 gallons, but are less than 75,000
gallons, and 10,000 of such gallons are diesel. During the grandfather period
for existing licensed facilities (which expired January 1, 1996), facilities
were required to average monthly sales of at least 25,000 gallons per month,
commencing October 1994, in order to continue operating video poker devices at
the facility. As of December 31, 1998, four of the truck stop facilities at
which Operator operates truck stop casinos was operating the maximum number of
50 devices. However, as of December 31, 1998, fuel sales at The Diamond Jubilee
were below the level required to operate 50 video poker devices, and on February
1, 1997 and August 16, 1998 ten devices and five devices, respectively, were
removed from operations at The Diamond Jubilee until increased fuel sales are
maintained. It is anticipated that the Division will review fuel sales at truck
stops on a quarterly basis to determine whether the average monthly fuel sales
volumes are being satisfied for the number of devices operated, and, if not, the
number of operating devices will be reduced until the next quarterly review. The
reduction in the number of devices operated at the Operator's truck stop casinos
could have an adverse effect on the cash flow of the Company if the level of
fuel sales cannot be increased to reach the former level of devices maintained
by Operator, although such effect will be mitigated by the fact that rarely are
all devices in a location in operation at the same time.
There has been during the past several years a perceived increase in anti-
gaming sentiment in Louisiana within certain segments of the population and with
certain politicians. In April 1996, the Louisiana Legislature approved a local-
option bill which gave the voters in each parish the right to decide during the
November 5, 1996, general election what forms of gaming they want to continue in
their parish. At this general election, all parishes in which the Company
operates video poker casinos voted to continue truck stop video poker, but two
parishes voted to discontinue video poker casinos which will result in the
future closure of four taverns and the loss of nine video poker devices as of
June 30, 1999. The Company believes there is continuing anti-gaming sentiment
prevailing within certain segments of the population and with certain
politicians. From time to time bills are proposed in the legislature to
restrict or terminate truck stop video poker casinos, and the Gaming Control
Board and Division are interpreting very strictly various regulatory
requirements which sometimes involve subjective criteria, which interpretations
may result in the loss of licenses by certain licensees. The Company cannot
predict whether anti-gaming sentiment or any future proposed legislation will
result in further changes to the gaming laws of Louisiana, or an outright ban on
certain forms of gaming, including truck stop video poker casinos. The State of
Louisiana and the local parishes generate substantial revenues from license fees
and taxes on the gaming industry, so the loss of portions of these revenues
would most likely be carefully examined in connection with any future proposed
limitations on gaming. The Company continues to monitor these proceedings and
provides input as appropriate. The Company also continues to review other
gaming opportunities outside Louisiana, and other non-gaming opportunities, for
purposes of diversification.
The Gaming Control Board has undertaken a review of all licensees operating
video poker casinos. The Company is aware of at least two operators who have
lost their licenses on the grounds they were not in compliance with Louisiana
requirements. The Operator is being examined as part of this process. See
"License Renewal Process", above, for a description of this examination and the
possible results thereof.
Other States
The ownership and operation of gaming facilities in other states where
gaming is legal are subject to extensive state and local regulation. To the
extent the Company expands its gaming operations into other states, the Company
will, among other things, be required to register under the gaming acts of such
states and its gaming operations will be subject to the licensing and regulatory
control of the gaming commissions of such states, and various local, city and
county regulatory agencies. The Company will be required to submit detailed
financial, operating and other reports to such gaming commissions, and
substantially all loans, leases, sales of securities and similar financing
transactions entered into by the Company will be required to be reported to or
approved by such gaming commissions. The Company will also be required to
periodically submit detailed financial and operating reports and to furnish any
other information required thereby.
Each of the directors, officer and key employees of the Company who are
actively and directly engaged in the administration or supervision of gaming, or
who have any other significant involvement with the activities of the Company,
will be required to be found suitable therefor, and may be required to be
licensed, by applicable gaming commissions. The finding of suitability is
comparable to licensing, and both require submission of detailed personal
financial information followed by a thorough investigation. In addition, any
individual who is found to have a material relationship to, or material
involvement with, the Company may be required to be investigated in order to be
found
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<PAGE>
suitable or to be licensed as a business associate of the Company. Key
employees, controlling persons or others who exercise significant influence upon
the management or affairs of the Company may also be deemed to have such a
relationship or involvement. There can be no assurance that such persons will be
found suitable by the applicable gaming commissions in states in which the
Company may seek to expand.
Federal Regulation
Operator is required to file annually with the United States Department of
Justice under the Gambling Devices Act of 1962. All currently required filings
have been made.
Regulation - Cruise and Travel Operations
GalaxSea must comply with federal and applicable state laws regarding its
franchising operations, including the preparation and distribution to potential
franchisees of a franchisee offering circular, and the registration of GalaxSea
and the circular in certain states.
There are no regulations or licensing requirements applicable to I.T.
Cruise's operations.
Restrictions on Stockholders; Mandatory Disposition if Found Unsuitable
The Louisiana Act requires holders of 5% or more of the Company's Common
Stock to meet the suitability requirements applicable for the types of licenses
held by the Company, Operator or River Port LLC, and, if required by the
Division, to file a license application with the Division. Failure to meet such
suitability requirements or file any required application can result in
suspension or forfeiture of the Louisiana licenses. Other states grant their
gaming commissions the discretion to require a suitability finding with respect
to anyone who acquires any security of the Company, regardless of the percentage
of ownership. Furthermore, certain of these states provide that any owner of
voting securities found unsuitable and who holds, directly or indirectly, any
beneficial ownership of equity interests in the Company beyond such period of
time as may be prescribed by the gaming commission of such state may be guilty
of a crime. Any person who fails or refuses to apply for a finding of
suitability or a license within a specified number of days after being ordered
to do so by an applicable gaming commission may be found unsuitable. In
addition, certain of these states provide that if any owner of voting securities
is found to be unsuitable, such owner must immediately surrender all securities
to the Company, and the Company must refund any money or other thing of value
that may have been invested in or made use of by the Company.
As a result of the foregoing restrictions on ownership, the Company's
Certificate of Incorporation was amended in conjunction with the Merger with OM
to provide that if a holder or a beneficial holder of Common Stock or any other
class of capital stock is required by the Division or the gaming commission of
any other state to be found suitable, the holder shall apply for a finding of
suitability within the time period required by applicable law or by such
regulatory authority. Further, the applicant for a finding of suitability will
be required to pay all costs of the investigation for such finding of
suitability. The amended Certificate also provides that if a holder or
beneficial owner who is required to be found suitable does not apply for such
finding within the required time period, or is not found suitable by the
applicable regulatory authority, (i) the holder shall, upon request of the
Company, dispose of his Common Stock or any other class of capital stock within
30 days or within the time prescribed by the applicable regulatory authority,
whichever is earlier, or (ii) the Company may, at its option, redeem the
holder's Common Stock or any other class of capital stock at the lesser of the
market price thereof on the date of the finding of unsuitability or the price at
which such Common Stock or any other class of capital stock was acquired by the
holder, and (iii) if required under applicable state law, such shares may not be
voted by such unsuitable person and no dividends or distributions of any kind
may be made on such shares to such unsuitable person.
Insurance
The Company carries commercial general liability coverage on the properties
it operates. The Company also carries property insurance on an actual cash
value basis covering the cost of direct physical damage.
ITEM 2. DESCRIPTION OF PROPERTY
- --------------------------------
The Company owns the Gold Rush truck stop facility and the building in
which the video poker casino is operated. This property is subject to a
mortgage having a remaining principal balance of $612,651 at December 31,
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1998, and which requires monthly payments of principal and interest of
approximately $22,814 through June 20, 2001, at which time the note will be paid
in full. This property is further described under Item 1 - "Description of
Business --Operation of Truck Stop Facilities", "-- Assignment to OM Operating,
L.L.C." and "-- Operation of Video Poker Casinos". Reference is hereby made to
these sections for a description of this property and the Company's various
rights relative to this property.
A description of the various agreements under which the Company or Operator
operates and manages the two other truck stop facilities and participates in the
ownership of the four other truck stop video poker casinos, and a description of
the River Port lease, is also included under Item 1--"Description of Business --
Operation of Truck Stop Facilities", "--Assignment to OM Operating, L.L.C." and
"-- Operation of Video Poker Casinos". Reference is also hereby made to these
sections for a description of those agreements and the Company's various rights
relative to the truck stops.
The Company's principal executive office is located in Dallas, Texas. The
Company leases approximately 5,645 square feet pursuant to a 72 month lease
(commencing November 1996) which provides for a rental rate of approximately
$4,704 per month. The Company subleases approximately 2,015 square feet of its
office space to International for $1,595 per month pursuant to a month to month
verbal agreement.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
T.B. Guillory ("Guillory") et al versus North American Gaming and
Entertainment Corporation and O.M. Operating, LLC, 27th Judicial District Court,
St. Landry Parish, Louisiana. The preliminary question to be decided by the
court 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 filed an appeal of this judgment. The Third Circuit Court of Appeals
heard the appeal on November 6, 1998 and upheld the ruling of the trial court
that the renewal option was not valid. The Company and Operator appealed to the
Supreme Court of Louisiana which refused to review the Court of Appeals'
decision on March 29, 1999. The Company and Operator have no further right to
appeal the decision that the lease will not be renewed. 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 was required to escrow 100% of the
operating profit. As of March 1, 1999, Operator had placed in escrow $775,595
for the period from May 1997 through February 1999. Operator and the Company
also petitioned the court to grant a management fee for services from April 30,
1997 through the date the appeal was concluded and also asserted a claim for
damages for unjust enrichment against Guillory. On March 31, 1999, the parties
agreed to a full settlement regarding the remaining outstanding issues including
the ownership of the escrowed funds. As a result of the settlement, the Company
and Operator agreed to vacate the property effective 12:01 a.m., April 1, 1999.
Under the terms of the settlement, the Company and Operator will receive
$325,000 from the escrow fund and will be entitled to 20% of the net profits of
King's Lucky Lady for the month of March 1999. All remaining claims were
dismissed.
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. This suit will be dismissed
with prejudice by the plaintiffs in connection with the consummation of the
Settlement Agreement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- -----------------------------------------------------------------
The Company's Common Stock is traded over-the-counter and quoted from time
to time in the OTC Bulletin Board "pink sheets" under the trading symbol "NAGM".
Consequently, there is currently no established public trading market for the
Company's Common Stock. The following table sets forth the range of high and
low bid prices as reported by the OTC Bulletin Board for the periods indicated.
Such quotations represent inter-dealer prices without retail markup, markdown,
or commission, and may not necessarily represent actual transactions.
Bid Price
Calendar Years -------------------
by Quarter High Low
-------------- ------- -------
1998 First $ 1/32 $ 1/32
Second 3/16 1/32
Third 1/10 1/16
Fourth 1/16 1/20
1997 First $ 5/32 $ 1/8
Second 9/16 5/32
Third 5/32 3/32
Fourth 3/32 1/32
At December 31, 1998, the Company had approximately 3,270 common
stockholders of record.
The Company has not paid cash dividends on Common Stock during the last two
years and the Board of Directors of the Company does not currently intend to pay
cash dividends on Common Stock in the foreseeable future. The Company may not
declare or pay dividends on Common Stock if there are accumulated and unpaid
dividends on Class A Preferred Stock. From October 17, 1994 through May 31,
1996, the outstanding Class A Preferred Stock bore a dividend of $.30 per annum
(payable monthly), an annual dividend of $480,000 because all 1,600,000 shares
were outstanding. The Company is $780,000 in arrears on dividends on its Class
A Preferred Stock as of December 31, 1998, although effective as of March 31,
1999, $332,982 of such accrued dividends were cancelled pursuant to the
Settlement Agreement. These dividends will accumulate and be payable in full
prior to any distributions on the Common Stock. Simultaneously with the closing
of its acquisition of GalaxSea on June 10, 1996, the Company 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 until June 10, 1998 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 prior to June 10, 1998. Effective June 4, 1998,
872,714 shares of Class A Preferred Stock were converted by the Company into
5,587,544 shares of Common Stock and the remaining 414,286 shares of Class A
Preferred Stock were converted by the Company into 2,652,456 shares of Common
Stock effective July 3, 1998.
As of March 31, 1999, the Company was 26 principal payments in arrears (a
total of $1,062,746 in principal is past due; interest has not been paid since
July 31, 1998, and an aggregate of $56,600 in interest is past due) to
International Tours, Inc. ("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 March 31, 1999 and is secured by a pledge of the
outstanding capital stock of I.T. Cruise and GalaxSea owned by the Company. On
March 22, 1999, International agreed to allow the $1,119,346 then accrued and
owed to it to continue to remain outstanding (with interest accruing thereon)
until the earlier of January 1, 2000 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, 2000, 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 $514,067 and
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accrued interest of $92,376 at March 31, 1999 (after cancellation of the
remaining principal of $382,279 owing on debentures in the original principal
amount of $400,859.61, and $68,810 of accrued interest as part of the Settlement
Agreement), and require aggregate payments of principal and interest of $11,250
per month until July 1, 1997, $31,114 per month, from July 1, 1997 through
December 31, 1997, and $16,670 per month thereafter. As of March 31, 1999, 23
monthly payments, for a total of $700,729 (after the redemption of debentures in
accordance with the Settlement Agreement), have not been made pursuant to the
subordinated debentures. The subordinated debentures and the amounts unpaid are
expressly made subordinate to the International note as well as other senior
debt of the Company. Until the International note is paid in full and the
subordinated debentures are paid in full, the Company is prohibited from paying
dividends on its Common Stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
- ------------------------------------------------------------------
Liquidity and Capital Resources
Present Cash Shortfall. As of January 1, 1999, the Company was 24 months
in arrears (a total of $986,111 of principal and $40,430 in interest payable) in
payments to International on the promissory note issued to International by the
Company as partial consideration for the I.T. Cruise acquisition. The note had
an original principal balance of $1,400,000, requires monthly payments of
principal and interest of $50,000, had an unpaid principal balance of $1,062,746
at January 1, 1999, 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$1,119,346 accrued and owed
at April 1, 1999 to it to continue to remain outstanding (with interest accruing
thereon) until the earlier of January 1, 2000 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, 2000, 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 $514,067 and accrued
interest of $92,376 at April 1, 1999 (after cancellation of the remaining
principal balance of $382,279 owing on debentures in the original principal
amount of $400,859.61 and $68,810 of accrued interest as part of the Settlement
Agreement). These debentures require aggregate payments of principal and
interest of $11,250 per month until July 1, 1997, $31,114 per month from July 1,
1997 through December 31, 1997 and $16,670 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 1999.
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, the restructuring of the Company's revenue and
profits interests in OM Operating, L.L.C. and River Port Truck Stop, LLC (see
"Item 1 -- Description of Business -- Restructure of OM Operating, L.L.C. and --
"Restructure of River Port Truck Stop, LLC"), and any loss of additional video
poker devices at any of the Company's video poker casinos as a result of reduced
fuel sales. The Company believes it will be able to negotiate a satisfactory
revised payment schedule by the middle of the second quarter of 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.
As described in "Item 1 -- Description of Business", the structure of
Operator and River Port LLC and the various interests (including revenue and
profits interests) of the Company in Operator and River Port LLC have been
restructured in an attempt to satisfy certain concerns raised by the Division.
The Company believes the further restructuring of Operator and River Port LLC
addresses the concerns raised by the Division. The Company has submitted to the
Division and Gaming Control Board the documents effecting the further
restructure of Operator and River Port LLC for their review in connection with
Operator's license renewal request and the granting of a license
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to River Port LLC. There can be no assurance that the Gaming Control Board will
agree with the Company's conclusion that Operator and River Port LLC, as
restructured, comply with the residency requirements of the Louisiana Act, but
the Company believes the Gaming Control Board will agree with the Company's
conclusion. Any adverse ruling by the 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 further material adverse changes in Operator's
or River Port's structure, but it cannot predict the results of the review until
the review is completed. See also, "Item 1 -- Description of Business --
Restructure of OM Operating, L.L.C.", --"Restructure of River Port Truck Stop,
LLC, -- "Regulation and Licensing - Gaming Operations -- Louisiana --
Establishment License" and --"Recent Changes in Louisiana Act" for a discussion
of the strict enforcement of the Louisiana Act and the perceived anti-gaming
sentiment in Louisiana within certain segments of the population and with
certain politicians, which sentiment may also impact the review of Operator and
River Port LLC and any possible further restructuring of Operator or River Port,
or even a possible loss of Operator's license to operate the video poker casinos
and the inability of River Port LLC to obtain a license to operate its video
poker casino.
The Company will seek to meet its long-term liquidity needs primarily
through cash flow from operations, restructuring its payment obligations on
certain debt described above, additional borrowings from the Company's
traditional lending sources and possible sales of equity or debt securities.
While the Company believes it will be able to generate and obtain the necessary
capital to meet such needs if it is able to satisfactorily restructure its
payment obligations as described above, there can be no assurance that all of
such capital will be available on terms acceptable to the Company, which could
delay or cause the Company to postpone certain planned activities.
General Condition. The Company ended fiscal 1998 with $281,109 in cash and
other current assets amounting to $510,590, including accounts receivable (net)
of $270,525, inventories and prepaid expenses of $170,899, and current notes
receivable of $39,166. The Company also reflected an asset of $675,488
representing the 51% interest of Williams in Operator as of December 31, 1998.
The Company's total liabilities were $6,469,428 at December 31, 1998, including
accounts payable and accrued liabilities of $1,114,966, current notes payable of
$2,357,498, long-term notes payable of $1,446,749 and preferred stock dividends
payable of $780,000. The Company also reflected a liability of $770,215
representing the 51% interest of Williams in Operator as of December 31, 1998.
The Company's liabilities increased $1,051,745 from $5,417,683 at December 31,
1997 to $6,469,428 at December 31, 1998. This increase was comprised of
increases in current liabilities of $180,145 and other notes totaling $36,024,
an increase due to construction of the River Port Truck Stop amounting to
$1,465,409, reductions in liabilities from payments on long and short-term debt
to banks and equipment manufacturers totaling $241,167, payments on the Ozdon
notes issued for the stock purchase of the Gold Rush of $334,558, note
reductions related to the acquisition of I.T. Cruise and GalaxSea of $54,108.
Accounts payable and accrued liabilities of $1,114,966 included $583,193 in
trade payables, state franchise taxes of $105,626, casino distributions of
$122,510, payroll and payroll taxes of $92,544, an income tax credit of
$100,313, accrued interest of $188,273, and $125,887 accrued indebtedness on the
River Port construction loan.
The current portion of other notes payable totaling $2,357,498 includes
$541,336 related to the acquisition of I.T. Cruise and GalaxSea; $99,736
payable to a bank for the construction of the Pelican Palace and the purchase of
the Lucky Longhorn; $203,762 payable to Class A Preferred shareholders; $47,255
in equipment leases and other notes; $1,465,409 payable to a bank for the
construction of the River Port Truck Stop.
Long-term debt of $1,446,749 includes $187,233 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; $537,060 related to the
acquisition of I.T. Cruise and GalaxSea; and $29,872 in equipment leases and
other notes.
In July 1993, OM Investors, Inc. committed to loan $1,450,000 to the Curray
Corporation ("Curray") for the construction of the Pelican Palace truck stop
and video poker facility in Toomey, Louisiana. Construction was commenced in
1993 and substantially completed in March 1994. The $1,450,000 loan was
evidenced by a promissory note payable to the Company which was paid-in-full as
of May 31, 1996. Under the Operating and Financing Agreement with Curray, 70%
of the net income from the operation of the facility was dedicated to the
repayment of the note. Now that the note receivable from Curray is paid-in-
full, net income is split 50% to the Company and 50% to Curray.
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Effective July 1, 1996 the Company entered into a sublease agreement with
New Orleans Video Poker, Inc. ("NOVP") to sublease and manage The Diamond
Jubilee video poker casino and truck stop in New Orleans, Louisiana. This
sublease provides for a 50/50 split between the Company and NOVP of the net cash
flow generated by the Diamond Jubilee. The sublease further provides for the
Company to assume the outstanding liabilities of NOVP, exclusive of notes
payable to the principals of NOVP, as the purchase price for 50 video poker
devices and an automated teller machine. The Company has the option to
purchase NOVP's 50% share of the cash flow. The transaction also included the
issuance of 450,000 shares of common stock in the Company to NOVP.
At December 31, 1998, property and equipment (net) at truck stops, video
poker facilities, cruise marketing and corporate offices totaled $945,127.
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 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.
Results of Operations
Net Income for the twelve months ended December 31, 1998.
Company operations resulted in a net loss before income taxes of $213,771
for the twelve months ended December 31, 1998, a decrease of $368,593 from
1997's income of $154,822. The GalaxSea and I.T. Cruise marketing and franchise
operations recorded a loss of $186,981 in 1998 compared to 1997's loss of
$236,926. 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, Louisiana, with a resulting operating loss
of $44,019 for 1997 and $149,388 for 1998. The Company's operating profit
before depreciation, amortization and interest expense amounted to $1,219,177
for 1998, up 4% from 1997's $1,245,054.
Revenues totaled $25,349,736 for 1998 compared to $23,806,042 for 1997, up 6.5%.
Video Poker revenues totaled $15,704,231 for 1998, up $756,991, or 5% from
1997's $14,947,240. Gains were achieved at most all locations; Pelican Palace -
$430,209; the Gold Rush - $114,342; King's Lucky Lady -$227,449; Lucky
Longhorn - $261,140; and Diamond Jubilee - $20,904. Declines in video poker
revenue were experienced at Stelly's - $183,853 from 1997 to 1998, due to its
closing and the Route Operations of $113,201. Video poker revenue production by
location for 1998 and 1997 was as follows:
Lucky Longhorn, Vinton, LA - $3,777,237 in 1998 and $3,516,099 in 1997, up
7%; resulting in average daily revenue per device (50 devices) of $207 for 1998
compared to 1997's $193.
Pelican Palace, Toomey, LA -$3,523,383 in 1998 and $3,093,173 in 1997, up
14%; resulting in average daily revenue per device (50 devices) of $193 for 1998
compared to 1997's $170.
Gold Rush, in Opelousas, LA - $3,184,433 in 1998 and $3,070,091 in 1997, up
4%; resulting in average daily revenue per device (50 devices) of $174 for 1998
compared to $168 for 1997.
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Diamond Jubilee, in New Orleans, Louisiana - $2,419,866 in 1998 and
$2,398,962 in 1997, up 1%; resulting in average daily revenue per device (on an
average of 38.7 devices) of $171 for 1998 compared to $161 per device (40.9
devices) for 1997.
King's Lucky Lady, Port Barre, LA - $2,573,430 in 1998 and $2,345,981 in
1997, up 10%; resulting in average daily revenue per device (50 devices) of $141
for 1998 compared to 1997's $129.
Route Operations - South LA - $225,882 in 1998 and $339,083 in 1997, down
33%; resulting in average daily revenue per device (on an average of 11 devices)
of $56 for 1998 compared to average daily revenue per device (on an average of
22 devices) of $42 in 1997.
Stelly's-LeBeau, LA - closed May 28, 1997 and therefore contributed no
revenue for 1998 and added $183,853 to the revenue stream in 1997; resulting in
average daily revenue per device (16 devices) of $78 for 1997.
Retail revenues from fuel and convenience store, and food and beverage
operations amounted to $8,679,063 in 1998 compared to 1997's $7,553,400, an
increase of 15%.
Combined fuel and convenience store sales for 1998 increased $775,427, or
13% to $6,742,315 compared to $5,966,888 in 1997. Fuel sales for 1998 amounted
to $5,533,034 making up 63.8% of the Company's retail sales, compared to 1997's
fuel sales of $5,016,039 contributing 64.4% of the Company's retail sales.
Convenience store retail sales totaling $1,209,281 were up 27% for 1998 versus
1997's $950,849. Growth occurred at the Gold Rush, which reported $3,410,272 in
revenue compared to 1997's $3,297,550, up 3%; King's Lucky Lady generated
$2,092,273, down 3% from 1997's $2,160,010; and the River Port Truck Stop posted
sales totaling $943,383, up 85% from 1997's $509,328 (June through December).
The Diamond Jubilee Truck Stop generated sales of $296,387 for the period August
10, 1998 through December 1998.
1998 food and beverage sales increased $350,236, or 22% to $1,936,748,
compared to $1,586,512 in 1997. Food and beverage sales for each location were
as follows: King's Lucky Lady $884,100 in 1998 compared to 1997's $821,342, up
8%; Pelican Palace - $393,389 in 1998 versus $276,764 in 1997, up 42%; Gold
Rush - $478,467 in 1998 compared to $419,205 in 1997, up 14%; and The Diamond
Jubilee - $180,792 in 1998 compared to $69,201 for 1997, up 161%.
Cruise revenues generated by I.T. Cruise and GalaxSea totaled $966,442 in
1998 compared to $1,305,402 in 1997. I.T. Cruise revenue resulting from its
contracts with International Tours, Inc. amounted to accrued overrides and
commissions of $211,086 for 1998 compared to 1997's $212,452. GalaxSea's
franchise system revenues was comprised of overrides and commissions of $140,061
in 1998 versus $177,654 in 1997; monthly license fees of $167,661 in 1998
compared to $131,871 in 1997; franchise sales fees of $2,500 in 1998 versus
1997's $28,250; marketing fees totaling $364,548 in 1998 compared to 1997's
$664,853; convention and training fees of $68,149 in 1998 compared to $90,422 in
1997. Income resulting from the group department sales totaled $12,437 for
1998.
Casino and Truck Stop Operations
Casino and Truck Stop Operations recorded a direct operating profit of
$2,846,807 in 1998, a decrease of $99,086, or 3%, over 1997's $2,945,893.
The Gold Rush's casino and truck stop operations produced operating profit
of $1,199,545 in 1998 compared to $1,142,331 in 1997, up 5%. Fuel sales
averaged approximately 223,000 gallons per month.
The Lucky Longhorn's operating profit was $622,277 in 1998 compared to
$648,338 in 1997, down 4%. The Lucky Longhorn has fourteen competitors in its
market area, including a Las Vegas style Native American casino and four river
boats. 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. Fuel sales averaged
approximately 296,000 gallons per month.
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The Pelican Palace generated operating profit of $634,209 in 1998 compared
to 1997's $554,697, an increase of 14%. The Pelican has fourteen competitors in
its market area, including a Las Vegas style Native American casino and four
river boats. Fuel sales averaged approximately 163,000 gallons per month.
King's Lucky Lady's operating profit for 1998 was $561,959 compared to
operating profit for 1997 of $492,149, up 14%. See "Item 1 -- Description of
Business -- Operation of Truck Stop Facilities -- King's Lucky Lady -Port Barre,
Louisiana" for a discussion of the judgement rendered against Company regarding
the validity of the it's 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 141,000 gallons per month.
The Diamond Jubilee generated operating losses of $98,184 in 1998, compared
to 1997's profit of $97,604, down 201%; two competitors with a total of 80 video
poker devices came into the market during 1997 thus diluting The Diamond
Jubilee's market share. See " Item 1 -- Description of Business -- Operation of
Video Poker Casinos -- The Diamond Jubilee - New Orleans, Louisiana" for a
discussion of the loss of 15 devices at The Diamond Jubilee. Average fuel sales
were 62,000 for 1998. Increased price competition has affected sales, which
resulted in less than the required minimum for the fourth quarter of 1997
(100,000 gallons per month is necessary for 50 devices). The Company operated
50 devices in January 1997; 40 devices from January 1997 through August 1998 and
35 devices from August 1998 through December 1998.
Route Operations generated operating profit for 1998 of $29,651 compared to
operating profit for 1997 of $46,133, down 36%. At December 31, 1998, the
Company had 9 devices operating within 4 locations, compared to 1997, when the
Company operated 13 devices within 6 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.
River Port Truck Stop's operating loss for 1998 was $102,650, a complete
calendar year, compared to a loss of $44,019 for 1997 (June through December
1997). Fuel sales averaged approximately 53,300 gallons per month.
Stelly's Southern Gold was closed May 28, 1997 and had recorded operating
profit through December 31, 1997 of $8,662. 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.
Cruise Operations
Combined Cruise Operations recorded an operating loss of $181,734 in 1998,
on revenues totaling $966,442. 1997's loss of $236,926 was based on revenues of
$1,305,402. A reduction in the volume of marketing promotions accounted for the
decrease in revenue from 1997 to 1998.
GalaxSea's 1998 revenues amounted to $755,358, with an operating loss of
$300,425; revenues recorded for I.T. Cruise were $211,084, with an operating
profit of $118,691 for 1998.
Expenses totaled $25,563,507 for 1998 compared to $23,651,220 for 1997.
Video poker operations recorded a direct cost of revenue amounting to
$8,871,204 in 1998 and $8,574,423 in 1997, an increase of 3%. This includes
fees paid to the State of Louisiana of $5,327,151 (33.9% of video poker
revenue) in 1998 and $5,090,508 (34.1% of video poker revenue) in 1997, and
profit sharing payments as defined in operating and management contracts of
$3,544,053 (22.6% of video poker revenue) in 1998 and $3,483,915 (23.3% of
video poker revenue) in 1997.
Retail operations recorded a cost of revenue related to fuel, convenience
store, food and beverage operations totaling $7,065,399 (81.4% of truck stop and
convenience store sales) in 1998, compared to $6,304,179 (83.5% of truck stop
and convenience store sales) in 1997. Fuel cost of goods sold for 1998
amounted to $5,163,881, representing a cost margin of 93.2%, compared to 1997's
fuel cost of goods sold totaling $4,722,738, with a cost margin of 94.2%. 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
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 $971,754 (80.0% of
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sales) up 20% versus 1997's $807,846 (85.0% of sales). In addition, the cost of
revenue in food and beverage operations amounted to $929,764, up 20% in 1998
with a cost of goods sold margin of 48.0% compared to 1997's $773,595, with a
cost of goods sold margin of 48.8%. The need to remain competitive at all
locations requires the setting of lower price points, which in turn results in a
significant number of sales at a low dollar value. The State regulations
governing truck stops require operation of 50 seat (minimum) restaurants on a
24-hour basis in order to operate 19 or more video poker machines. The Company
presently operates three of these low volume restaurants.
Cruise operations recorded a direct cost of revenue amounting to $417,610
for 1998. This was comprised of marketing, training and promotional expenses
totaling $348,377 and royalty fees of $69,233. During 1997 the Company recorded
a total of $671,313 in direct costs of revenue.
General operating and administrative expenses of $7,776,346 in 1998 and
$7,078,853 in 1997 represented 30.7% and 29.7% of total revenue for 1998 and
1997, respectively.
Depreciation and amortization amounted to $630,994 in 1998 and $754,021 in
1997. Interest expense was $307,187 in 1998 and $336,211 in 1997. Other
revenue and expense (net) was ($494,767) in 1998, compared to $67,780 in 1997.
The Company recorded $503,395 in litigation reserve expense in 1998 (See "Item 1
- -- Description of Business -- Operation of Truck Stop Facilities -- Kings Lucky
Lady") and $139,660 in 1997.
Comparison of 1998 to 1997
Video poker revenues increased from $14,947,240 in 1997 to $15,704,231 in
1998, up $756,991 or 5.1%. The Pelican Palace produced $3,523,383 in 1998
versus $3,093,173 in 1997, an increase of $430,207, or 14%. The Gold Rush
posted $3,184,433 in 1998 compared with $3,070,091 in 1997, up $114,342, or 4%.
King's Lucky Lady recorded video poker revenues of $2,573,430 in 1998 versus
$2,345,981 in 1997, up $227,449, or 10%. The Lucky Longhorn produced $3,777,239
in 1998 as compared to $3,516,099 in 1997, an increase of $261,140, or 7%. The
Diamond Jubilee contributed $2,419,866 in revenues in 1998 compared to
$2,398,962 in 1997, an increase of $20,905. Declines in Route Operations
revenues were $113,202, from $339,083 in 1997 to $225,882 in 1998. Stelly's,
closed in May 1997, produced video poker revenue of $183,853 in approximately
five months of operation in 1997.
Retail revenues from fuel and convenience store, food and beverage
operations amounted to $8,679,063 in 1998 compared to 1997's $7,553,400, an
increase amounting to $1,125,663, or 15%. The cost of revenue related to fuel,
convenience store, food and beverage operations increased $761,220, or 12% from
$6,304,179 in 1997 to $7,065,399 in 1998. The Company recorded revenues for a
full fiscal year in 1998 at River Port, which totaled $943,383, compared to
1997's $509,328.
General operating and administrative expenses totaled $7,776,346 in 1998
and $7,078,853 for 1997, an increase of $697,493, or 9.9%. This overall
increase resulted primarily from payroll, truck stop and casino promotional
expenses and new operations.
Payroll related expenses increased $318,705, or 10%, from $3,177,717 in
1997 to $3,496,422 in 1998. This overall increase in payroll expense was
attributable primarily to the increase in Louisiana administration payroll costs
of $148,268. The Diamond Jubilee, adding truck stop and restaurant operations
for August through December, resulted in an increase in labor costs over 1997 of
$143,118. A full fiscal year of operations at the River Port Truck Stop
increased payroll by $63,785. All other Louisiana truck stop and casino
operations had an increase in payroll of $72,639. The increased minimum to
$5.15 per hour was in effect for a full year in 1998 as compared to 3 and one-
half months in 1997. Despite these uncontrolled increases, most locations
displayed an overall more effective plan to reduce payroll costs. Payroll costs
for cruise operations experienced a reduction of $109,105 during 1998.
Contract and professional services (outside services) expenses amounted to
$927,945 in 1998 as compared to 1997's $1,060,033, a decrease of $132,088, or
12%. Legal and accounting fees remained constant at $413,799 in 1998 and
$413,695 in 1997. Consulting fees/outside services decreased $132,192.
Truck stop and casino promotional expenses amounted to $1,187,829 in 1998,
up 48%, or $382,932 from 1997's $804,897, consisting of 4.9% and 3.9% of
combined truck stop and casino revenue for 1998 and 1997, respectively. This
increase in promotional expense was the result of targeted marketing programs to
maintain and/or to increase fuel sales and to increase the length of time
customers spend in the casino.
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The Company recorded expenses for a full fiscal period for River Port Truck
Stop along with five month operating the truck stop and restaurant at The
Diamond Jubilee. Direct operating expenses associated with these operations,
excluding payroll, outside services and promotional expenses, amounted to
$199,053 in 1998 compared to 1997's $81,795, an increase of $117,258, or 143%.
The Diamond Jubilee added $59,469, and River Port was up $57,789 or 71%. Direct
operating expenses related to cruise operations, excluding payroll and
professional expenses, amounted to $568,242.
All other expenses totaled $1,396,855 in 1998 compared to $1,271,756, an
increase of $125,099, or 10%.
Depreciation and amortization amounted to $630,994 in 1998 and $754,021 in
1997, a decrease of $123,027, or 16%. Depreciation and amortization on video
poker operations, which includes video poker machines, leasehold improvements
and revenue interest rights, amounted to $219,909 in 1998 compared to $335,324
for 1997. Depreciation and amortization on truck stop and convenience store
operations totaled $64,896 in 1998 and $59,215 for 1997; and amounted to $13,239
in 1998 versus 1997's $12,990 on corporate assets. Depreciation and
amortization related to cruise assets and the acquisition of GalaxSea Cruises
and Tours, Inc. and I.T. Cruise, Inc. was $332,950 for 1998 as compared to
$346,492 for 1997. Interest expense was $307,187 in 1998 and $336,211 for 1997,
a decrease of $29,024, or 8.6%. Combined other revenue and expense (net) totaled
a loss of $494,767 in 1998, which includes rental income, interest income, ATM
commissions and miscellaneous gains and losses on the disposal of assets. In
addition, during 1998 the Company and Operator were subject to a court order
which declared that 100% of the operating profit from King's Lucky Lady Casino
and Truck Stop must be placed in an escrow account effective March 3, 1998.
This escrow requirement amounted to $503,395 through December 31, 1998 and was
recorded as an expense entitled as a "litigation reserve".
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 244 video poker machines which are linked to an on-line tracking and
accounting system maintained by the Division's technical department. The
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
Division installed its new computer system in March of 1999 and will require
software upgrades for all video poker "Clerk Validation Terminals". There will
be a mandatory chip upgrade during the second 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 second 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. The company has
identified 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
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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-KSB 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 and River Port LLC 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-KSB. 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.
ITEM 7. FINANCIAL STATEMENTS
- -----------------------------
The financial statements required by this item begin at Page F-1 hereof.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
On December 4, 1998, the Company received a letter from its independent
accountant, Arthur Andersen LLP, that it was terminating the client-auditor
relationship between Arthur Andersen LLP and the Company. There were no
disagreements with Arthur Andersen LLP on any matters of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which, if not resolved to its satisfaction, would have caused it to make
reference to such disagreement in its report. A copy of a letter from Arthur
Andersen LLP, addressed to the Securities and Exchange Commission, concurring
with the Company's statements herein is filed as an Exhibit to this Form 10-KSB.
Neither of the reports of Arthur Andersen LLP on the Company's financial
statements for the Company's fiscal years ended December 31, 1997 and 1996
contained an adverse opinion or disclaimer of opinion, or was modified as to
uncertainty, audit scope, or accounting principles.
Effective February 1, 1999, the Company engaged Sartain Fischbein & Co. as
its independent accountant to audit the Company's financial statements.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
- ----------------------------------------------------------------------
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
- -------------------------------------------------
The following table provides information as of March 31, 1999, with respect
to each of the Company's directors and each executive officer:
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Served as Executive
Officer or
Name Age Position Director Since
---- --- -------- -------------------
Directors and Executive Officers
E.H. Hawes, II 59 Director (Chairman), 1998
President and Chief
Executive Officer
Daryl N. Snadon/(1)/ 53 Director 1994
Richard P. Crane, Jr. 59 Director and Secretary 1994
Certain Officers of Certain Subsidiaries
Ron Blaylock 59 Chairman of I.T. Cruise, 1992
Inc. and GalaxSea Cruises
and Tours, Inc.
Ted C. Parker 44 President of I.T. Cruise, 1997
Inc. and GalaxSea Cruises
and Tours, Inc.
- --------------------
(1) Member of Audit and Compliance Review Committee.
E. H. Hawes, II. Mr. Hawes has been the Chairman of the Board, President
and Chief Executive Officer of the Company since January 7, 1998. He has been
the Chairman of the Board of IT Financial Corporation ("ITFC"), which is the
holding company for International Tours, Inc. ("International"), since 1969, and
has been the Chairman of the Board of International since 1969. ITFC and
International are privately owned corporations engaged in the business of travel
agency franchising and travel agency training and schools. Mr. Hawes has also
been President of Glacier Petroleum, Inc., a privately owned oil and gas
exploration company, since 1971.
Daryl N. Snadon. Mr. Snadon has been a Director of the Company since
January 1994. He has been sole proprietor of Beltway Development Company, a
real estate development company, in Dallas, Texas since 1973. Mr. Snadon has
also been the Chief Executive Officer of Beltway Construction Incorporated, a
general contractor, in Dallas, Texas since 1975, and President of Beltway
Management Corporation, a real estate leasing and management company, since
1988. Mr. Snadon holds an undergraduate degree from the University of Missouri
and is a graduate of the University of Missouri School of Law.
Richard P. Crane, Jr. Mr. Crane has been a partner in the law firm of
Musick, Peeler and Garrett, Santa Monica, California, since February 1997, and
prior to that time was a partner in the laws firms of Crane & McCann, Santa
Monica, California, for approximately three years, Crane, Rayle & Lennemann,
Santa Monica, California, for approximately two years, and Girardi, Keese &
Crane, Los Angeles, California, for 14 years. Mr. Crane has practiced law for
over 34 years, seven of which were with the U.S. Attorney General's Office where
for five years he was the Attorney in Charge and Chief Trial Counsel of the
Organized Crime and Racketeering Section of the Western Regional Office. He has
served as a Director and as Secretary of the Company since October 1994. Mr.
Crane is also a director of Service Merchandise, Inc. which is a publicly traded
company. He is a graduate of Vanderbilt University and holds a law degree from
Vanderbilt University Law School.
Ron Blaylock. Mr. Blaylock served as the President of I.T. Cruise, Inc.
("I.T. Cruise") from June 1993 until October 1997 and has served as Chairman
since June 1993. He has also served as Chairman of GalaxSea Cruises and Tours,
Inc. ("GalaxSea") since October 1995, and served as President of GalaxSea from
October 1995 until September 1996. He has been the President of International
since 1970 and the President of ITFC since 1986.
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Ted C. Parker, Jr. Mr. Parker has served as President of both GalaxSea and
I.T. Cruise since October 1997 and as Vice President of International since
November 1995. He was Vice President and a Director of both GalaxSea and I.T.
Cruise from November 1995 until October 1997. He was a consultant for
International and the Company from October 1994 until October 1995, and served
as President of Western Natural Gas Company (the Company's predecessor) from
January 1986 until October 1994. Mr. Parker holds an undergraduate degree from
Vanderbilt University and is a graduate of the Southern Methodist University
School of Law.
During 1998, the Board of Directors held two meetings, and took seven
corporate actions by unanimous written consent. The Company has an Audit and
Compliance Review Committee, but does not have a nominating or compensation
committee or any committee performing similar functions.
The Audit and Compliance Review Committee presently consists of Daryl N.
Snadon. This Committee is responsible for serving in an oversight and
supervisory capacity in the areas of accounting, auditing, licensing and
statutory and regulatory compliance. The Committee did not hold a meeting in
1998.
Non-officer directors of the Company were paid a fee of $500 for each
meeting of the Board attended. In addition, the Company reimburses the
directors for their expenses (if any) incurred in connection with their duties
as directors.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely upon a review of Forms 3, 4 and 5 furnished to the Company
pursuant to Rule 16a-3(e) promulgated under the Securities Exchange Act of 1934
(the "Exchange Act"), or upon written representations received by the Company,
the Company is not aware of any failure by any officer, director or beneficial
owner of more than 10% of the Company's Common Stock to timely file with the
Securities and Exchange Commission any Form 3, 4 or 5 relating to 1998.
ITEM 10. EXECUTIVE COMPENSATION
- -----------------------------------
The following table sets forth the compensation paid by the Company for
services rendered during the fiscal years ended December 31, 1998, 1997 and
1996, and the number of options granted, to the Chief Executive Officer of the
Company, and the value of the unexercised options held by such Chief Executive
Officer on December 31, 1998. No other executive officer of the Company received
remuneration in excess of $100,000 during 1998.
Summary Compensation Table
Long Term
Annual Compensation-
Name and Compensation Securities All
Principal -------------- Underlying Other
Position Year Salary Bonus Options or Warrants Compensation
--------- ---- -------------- ------------------- ------------
E. H. Hawes, II, 1998 $ - $ - - $63,125/(1)/
Chief Executive 1997 - - - 37,500/(1)/
Officer 1996 - - -
- --------------------
(1) Represents a consulting fee paid by the Company under a Consulting
Agreement which terminated January 14, 1998. Since January 14, 1998, Mr.
Hawes has received no compensation from the Company.
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<PAGE>
Option/SAR Grant Table
(Option/Warrant/SAR Grants in Last Fiscal Year)
Number of
Securities Percent of
Underlying Total Market
Options or Option/Warrant Exercise Price
Warrants Granted to or on Date
Granted Employees in Base Price of Grant Expiration
Name # Fiscal Year ($/Sh) ($/Sh) Date
---- ---------- -------------- ---------- ---------- ----------
E. H. Hawes, II - - $ - $ - -
Aggregated Option/Warrant/SAR Exercises in Last Fiscal
Year and FY-End Option/SAR Values
Value of
Unexercised
Shares Number of Securities In-the-Money
Acquired Underlying Unexercised Options/Warrants/
on Value Options/Warrants/SARs SARs at 1998
Exercise Realized at 1998 FY-End FY-End
Name # $ # $
---- --------- -------- ---------------------- -----------------
E. H. Hawes, II None None - $ -
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The following table sets forth certain information regarding the ownership
of Common Stock as of March 31, 1999, by each stockholder known to the Company
to own beneficially more than five percent of the outstanding Common Stock, each
current director, and all executive officers and directors as a group, based on
information provided to the Company by such persons. Except as otherwise
stated, each such person has sole investment and voting power with respect to
the shares set forth in the table:
Name and Address
of Beneficial Owner Number of Shares Percent /(1)/
------------------- ---------------- -------------
International Tours, Inc./(2)/ 17,386,960 41.6
13150 Coit Road
Suite 125
Dallas, Texas 75240
I.T. Financial Corporation/(2)/ 17,579,286 42.1
13150 Coit Road
Suite 125
Dallas, Texas 75240
Hawes Partners/(2)/ 17,579,286 42.1
Shangri-La Vista Tower
Route 3
Afton, Oklahoma 74331
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<PAGE>
E.H. Hawes, II/(2)/ 17,581,620 42.1
Shangri-La Vista Tower
Route 3
Afton, Oklahoma 74331
A. Keith Weber/(2)/ 17,673,015 42.3
2411 W. 59th Street
Mission Hills, Kansas 66208
Ron Blaylock/(2)/ 17,585,120 42.1
13150 Coit Road
Suite 125
Dallas, Texas 75240
Lamar E. Ozley, Jr./(3)/ 2,054,329 4.9
6306 Mill Point Circle
Dallas, Texas 75248
Donald I. Williams/(4)/ 2,553,000 6.1
P. & J. Williams, L.L.C.
903 East Main
New Roads, Louisiana 70760
D.W. Morton, Ltd./(5)/ 2,454,354 5.9
Delwin W. Morton
Brevely G. Morton
777 #. 15th Street
Plano, Texas 75074
Daryl N. Snadon/(6)/ 535,666 1.3
15280 Addison Rd., Ste 300
Dallas, Texas 75248
Richard P. Crane, Jr./(7)/ 785,556 1.9
530 Wilshire Blvd., Ste. 400
Santa Monica, California 90401
All Executive Officers and 18,902,842 44.7
Directors as a Group
(3 persons)/(6)(7)/
- --------------------
(1) The percentage of outstanding shares in based on 41,788,552 shares
outstanding as of March 31, 1999. In connection with the Settlement
Agreement, 8,167,632 shares of Common Stock will be repurchased and retired
by the Company. It is anticipated that such repurchase and retirement will
occur immediately following the annual meeting of the stockholders to be
held in May or June 1999. Upon such repurchase and retirement, the
ownership percentage of each stockholder (other than Donald I. Williams and
P. & J. Williams L.L.C., whose shares will be repurchased and retired)
reflected above will increase.
(2) International Tours, Inc. ("International") owns 17,386,960 shares of
Common Stock of record and beneficially. I.T. Financial Corporation
("ITFC"), E. H. Hawes, II, A. Keith Weber and Ron Blaylock own of record
and beneficially 192,326, 2,334, 93,729 and 5,834 shares of Common Stock,
respectively. Hawes Partners is a partnership one-third owned by each of
Messrs. Hawes, Weber and Blaylock. ITFC and Hawes Partners beneficially
own approximately 49.38% and 48.14%, respectively, of the outstanding
capital stock of International, and Hawes Partners beneficially owns
approximately 65% of the outstanding capital stock of ITFC. Consequently,
the 17,386,960 shares of Common Stock owned of record and beneficially by
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<PAGE>
International may also be deemed to be beneficially owned by each of ITFC,
Hawes Partners and Messrs. Hawes, Weber and Blaylock, and are reflected
accordingly in the table above for their respective ownership positions.
Each of ITFC, Hawes Partners and Messrs. Hawes, Weber and Blaylock disclaim
beneficial ownership of any of the other shares of the Company referenced
in this note not owned of record by that person or entity. Ted C. Parker,
Jr., an officer of International and the President of GalaxSea and I.T.
Cruise, owns 1,243,334 shares of Common Stock of record and beneficially.
Mr. Parker's shares are not included in the table above for the ownership
positions of International, ITFC, Hawes Partners or Messrs. Hawes, Weber
and Blaylock, and each of such persons and entities disclaims beneficial
ownership of Mr. Parker's shares, and Mr. Parker disclaims beneficial
ownership of any of the shares owned by any of such persons or entities.
(3) Includes 12,000 shares owned of record and beneficially by Mr. Ozley's
spouse, and 100,000 shares owned of record by his spouse as custodian for
their minor son under the Uniform Transfer to Minors Act. Mr. Ozley
disclaims beneficial ownership of these 112,000 shares.
(4) Includes 824,000 shares of Common Stock owned of record and beneficially by
Mr. Williams, 1,279,000 shares of Common Stock owned of record and
beneficially by P. & J. Williams, L.L.C., a limited liability company for
which Mr. Williams serves as sole manager and owns 1% and his two adult
daughters own 49% each and his wife owns 1%, and 450,000 shares of Common
Stock owned of record by New Orleans Video Poker, Inc., a corporation 50.1%
owned by Mr. Williams and his wife, and for which they serve as the sole
directors and Mr. Williams serves as President and Secretary. Mr. Williams
may direct the voting, or share in the direction of the voting, of these
shares and, therefore, is deemed to beneficially own these shares. All of
the shares will be repurchased and retired by the Company as described in
Note (1), above.
(5) D. W. Morton, Ltd. is a Texas limited partnership for which Delwin W.
Morton and his wife, Brevely G. Morton, serve as general partners. D.W.
Morton, Ltd. owns of record and beneficially 1,610,100 shares of Common
Stock. Mr. and Mrs. Morton may direct the voting, or share in the
direction of the voting, of these shares and, therefore, are deemed to
beneficially own these shares with D. W. Morton, Ltd. Mrs. Morton owns of
record and beneficially 844,254 shares of Common Stock. Mr. Morton and
D.W. Morton, Ltd. disclaim beneficial ownership of the shares owned by Mrs.
Morton.
(6) These shares are pledged as collateral on a note payable to Mr. Snadon's
former wife.
(7) Includes a vested option to acquire 500,000 shares.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
First Restructure of OM Operating, L.L.C. Louisiana law requires a device
operator's license in order to own and operate truck stop video poker devices,
and further requires that a licensed device owner and operator be at least
majority owned by Louisiana residents. Following the merger ("Merger") of the
Company and OM, there could be no assurance that the Company would be majority
owned by Louisiana residents, and if not, then OM would not be deemed majority
owned by Louisiana residents and would lose its device operator's license to
operate and manage its truck stop video poker casinos. Consequently, on the
effective date of the Merger, OM contributed and assigned to OM Operating,
L.L.C. ("Operator") all of its rights, duties and obligations to operate OM's
existing video poker casinos and its tavern route, and Operator became the
licensed device operator. Operator is a Louisiana limited liability company
organized by OM and Donald I. Williams ("Williams"), a former director and Vice
President of OM until the effective date of the Merger. Operator was initially
owned 51% by Williams and 49% by the Company, as successor in merger to OM.
In addition to contributing and assigning the right to operate the video
poker casino and tavern route operations to Operator, the Company, as successor
in merger to OM, also contributed and assigned all of its interest in 259 video
poker devices and related operating assets, subject to approximately $861,098 of
debt (as of the effective date of the Merger) which Operator agreed to pay. In
each of 1995 and 1996, the Company contributed and assigned an additional 50
devices and related operating assets subject to approximately $91,100 and
$96,050 of debt, respectively, with respect to the Company's acquisition of
Ozdon Investments, Inc. and the sublease with New Orleans Video Poker, Inc., and
funded approximately $44,300 and $7,400 in leasehold improvements during 1998
and 1997, respectively. In exchange for its contributions and assignments, the
Company was entitled to a 49% net profits
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interest in Operator and a special gross income allocation and distribution
equal to 20% of the net revenues generated from operation of the video poker
devices. For this purpose, net revenues means total money played in all devices,
less all payout of winnings and less all gaming and device taxes and fees
payable to the State of Louisiana. Operator is responsible for all operational
costs and expenses of the video poker casinos and the tavern route, including
labor, maintenance, repair and its share of the rental or other percentage fees
payable to the owners of the truck stop facilities in which the casinos are
located pursuant to the contracts between the Company and such owners, the
casino operations portion of which were assigned by the Company to Operator.
Effective April 15, 1998, the Company and 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 believed
effectively addressed 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 had 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 believed the restructure of
Operator would make an even stronger case that Operator satisfied such
requirements and allay any concerns and questions which the Gaming Control Board
or Division might have in this regard.
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 owned 51% and the Company owned 49% of the
ownership interests in Operator, the Company no longer had a 20% gross income
allocation and distribution right, and Williams owed the Company $4,000,000
pursuant to the Note. The Note was 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
was 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 was automatically reduced pro-rata (at percentages agreed
upon based on 1997 net operating income of each casino) if Operator lost the
right to operate any of the five existing video poker casinos.
Williams and the Company agreed to appoint George J. Akmon, who was the
Executive Vice President and Chief Financial Officer of the Company, as the
Manager of Operator, to replace Williams, the previous Manager. The Manager was
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 required the approval of 65% of the ownership
interests in Operator. Until the Note was paid in full, the Company had the
right to remove and appoint a new Manager with the concurrence of Williams, and
was required, at the request of Williams, to remove and replace any Manager who
failed to satisfactorily perform his duties. Once the Note was paid in full,
Managers were to 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 agreed to provide consulting and administrative services relating to the
daily management of each of Operator's video poker casinos. The Company was to
receive a fee of $400,000 per year for rendering such services, reduced by
$50,000 for each existing video poker casino Operator lost 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 expired
on the later of April 15, 2002 or the date the Note was paid in full, provided
the Company had 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 was reduced so the maximum term of such extension, when added to
the original term, did not exceed 12 years. The fee payable during any
extension term was to be agreed upon by the Company and Operator (acting at the
direction of Williams), and if they could not
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<PAGE>
reach agreement, they agreed to submit the issue to binding arbitration so that
a reasonable fee would be determined by binding arbitration.
Williams and Operator also entered into an Employment Agreement on April
15, 1998 pursuant to which Williams was to receive an annual salary of $250,000,
would be eligible to participate in any employee benefit plans of Operator,
would be furnished the use of a company automobile and would be reimbursed for
expenses incurred on behalf of Operator during the course of his employment.
The Employment Agreement was to terminate on the later of April 15, 2002 or the
date the Note was paid in full.
The Company agreed to lease to Operator the land and buildings constituting
The Gold Rush Truck Stop. The lease was effective April 15, 1998 and was a
triple-net lease pursuant to which Operator was responsible for property taxes,
insurance and all repairs and maintenance, except for the foundation, outer
walls and roof, for which the Company was responsible. The lease required
annual rental payments of $400,000 and was 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 would 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 proposed to sell them to
a third party. Williams had 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 desired to pursue must first be
presented to Operator for its review and determination whether it desired to
pursue such opportunity. If Operator elected not to purse the opportunity, then
the presenting party was free to pursue it for a certain specified period upon
terms and conditions substantially equivalent to those presented to Operator.
Williams was also entitled to receive a finder's fee of $50,000 for each
opportunity brought by him to Operator which was consummated by Operator.
The Company and Williams terminated the various rights of first refusal and
purchase options which the Company previously had with regard to the 51%
ownership interest of Williams. Pursuant to the Amendment, if either the
Company or Williams failed to maintain the suitability requirements of the
Louisiana Act, his or her ownership interests could be sold to a third party,
with the consent of the other party (which consent could not be unreasonably
withheld), upon such terms and conditions as he or it could negotiate with such
third party; provided, if such sale was not accomplished within specified time
periods, the other party had 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.
As long as the suitability standards were being maintained by each party,
each of Williams and the Company was 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 could not be unreasonably withheld. If the
Company was selling its ownership interests, it was also entitled to assign the
Consulting Agreement to the purchaser with the consent of Williams, which
consent could not be unreasonably withheld, if such purchaser had expertise to
perform the services being performed by the Company under the Consulting
Agreement.
Second Restructure of OM Operating, L.L.C. After the Company presented the
Amendment and related documents to the Division, the Company had a meeting on
November 13, 1998 with the Division, wherein the Division expressed serious
concerns and doubts that the Amendment would satisfy the Louisiana Act and
indicated the Division would recommend that Operator's license to operate video
poker casinos in Louisiana not be renewed, unless various changes were
implemented to comply with the Louisiana Act. Among the concerns expressed by
the Division were the 20% gross income allocation to the Company under the
Operating Agreement and its contribution, pursuant to the Amendment, by the
Company to Operator for additional interests in Operator which were then
assigned to Williams in exchange for a $4 million Note, in addition to certain
other aspects of Amendment No. One and the related documents. Rather than risk
loss of the Operator's license, the Company has entered into further amendments
to the Operating Agreement and various documents put into place in conjunction
with the Amendment, and has agreed to transfer 50% of its remaining Louisiana
gaming interests (including 50% of its interest in Operator, River Port Truck
Stop, LLC and the Gold Rush Truck Stop) to certain former holders of Class A
Preferred Stock of the Company and certain related persons and entities in
exchange for mutual releases and settlements, dismissal of pending litigation
and cancellation of debentures, dividends and Common Stock of the Company. The
Company
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believes the further restructuring of Operator effectively addresses the
concerns raised by the Division. The Company has submitted to the Division and
Gaming Control Board the documents effecting the further restructure of Operator
for their review in connection with 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 further restructured, complies with the residency
requirements of the Louisiana Act, but the Company believes the Gaming Control
Board will agree with such restructure and with the Company's conclusion.
As part of the further restructure of Operator, the Company entered into a
Release and Settlement Agreement (the "Settlement Agreement") with, among
others, Williams and ten former holders of Class A Preferred Stock of the
Company (the "North Louisiana Group") on February 2, 1999, but to become
automatically effective as of March 31, 1999. At February 2, 1999, the North
Louisiana Group owned 5,614,632 shares of Common Stock (representing
approximately 13.4% of the issued and outstanding shares of Common Stock) and
were owed $306,959.61 in principal amount of subordinated debentures, and were
owed accrued dividends of $254,982 accrued on the Class A Preferred Stock prior
to its conversion to Common Stock. As part of the Settlement Agreement and
pursuant to related documents executed in connection therewith, the North
Louisiana Group agreed, among other things, to (i) dismiss with prejudice its
pending lawsuit against the Company for the payment of accrued dividends and
agreed to cancel all accrued dividends payable to the North Louisiana Group;
(ii) mark their subordinated debentures "canceled" and return them to the
Company and cancel all principal and accrued interest thereunder; (iii) return
to the Company for cancellation 5,614,632 shares of Common Stock owned by the
North Louisiana Group; (iv) be responsible on a 50/50 basis with the Company for
any funds expended in settlement with any other former holders of Class A
Preferred Stock which the Company may desire to pursue; (v) assume 50% of the
debt owed by the Company, to Regions Bank, Springhill Branch, formerly known as
Springhill Bank & Trust Company, relating to the Company's Gold Rush Truck Stop;
and (vi) release all claims, known or unknown, which the North Louisiana Group
might have against, among others, the Company, International Tours, Inc.
("International") and the officers and directors of the Company as of the date
of the Settlement Agreement. In return, the Company (a) released all claims it
might have, known or unknown, against, among others, the North Louisiana Group
as of the date of the Settlement Agreement; (b) agreed to assign to one or more
members of the North Louisiana Group a 24.5% interest in Operator and a 25%
interest in River Port Truck Stop, LLC ("River Port LLC"); and (c) agreed to
assign to one or more members of the North Louisiana Group 50% of the Company's
ownership of the Gold Rush Truck Stop.
Under the Settlement Agreement, Williams agreed to release all claims he
might have, known or unknown, against, among others, the Company, International,
the officers and directors of the Company and the North Louisiana Group as of
the date of the Settlement Agreement, and the Company agreed to release all
claims the Company might have, known or unknown, against, among others, Williams
as of the date of the Settlement Agreement. Williams also agreed, among other
things, to (i) mark his subordinated debenture in the original principal amount
of $93,900 "canceled" and return it to the Company and cancel all principal and
accrued interest thereunder; (ii) return to the Company for cancellation 824,000
shares of Common Stock owned by Williams, 1,279,000 shares of Common Stock owned
by P. & J. Williams, L.L.C. (an affiliated entity) and 450,000 shares of Common
Stock owned by New Orleans Video Poker Company, Inc. (an affiliated entity), an
aggregate of 2,553,000 shares (representing approximately 6.1% of the issued and
outstanding shares of Common Stock); (iii) cancel the $78,000 of accrued
dividends payable to Williams accrued on the Class A Preferred Stock prior to
its conversion to Common Stock; and (iv) pay to the Company certain amounts
which could aggregate between $150,000 and $300,000 over six years in
conjunction with the possible additional settlements by the Company with other
former holders of Class A Preferred Stock which the Company may desire to
pursue. The Company and Williams also entered into amendments to several other
existing agreements in connection with the Settlement Agreement as described in
the following paragraphs.
The Company and Williams entered into a Second Amendment (the "Second
Amendment") to Operator's Operating Agreement, effective March 31, 1999. The
Second Amendment operates to amend the Operating Agreement, as amended by the
Amendment, to delete all references to the Note and to the contribution of the
20% special gross income allocation so that neither provision shall ever have
been deemed to have existed and neither provision shall have ever been of any
force or effect. As a result, the Note is deemed to never have existed and the
20% special gross income allocation was not deemed to have been contributed by
the Company for additional ownership interests in Operator. Under the Second
Amendment, the Operating Agreement was amended to terminate, and to delete all
references to, the 20% gross income allocation after March 31, 1999 and no
further allocation or distributions will be made to the Company pursuant to such
20% special gross income allocation. Thereafter, distributions will be made in
accordance with capital accounts and the Sharing Ratios of the Members, which
will be 51% to Williams, 24.5% to the Company and 24.5% to one or more members
of the North Louisiana Group; provided, however, Williams is entitled under the
Second Amendment to distribution of the initial $4,166 to be
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distributed per month up to a maximum of $50,000 per year, which distributions
are to be credited against any other distributions to Williams during such year.
Pursuant to the Second Amendment, Operator will no longer be managed by a
manager and, instead, will be managed by the members, who shall take actions by
the vote of members owning at least 65% of the Sharing Ratios, except for
certain enumerated major decisions which require unanimous vote. Related
agreements were also entered into effective as of March 31, 1999 canceling the
Note and the Company's security interest in the ownership interests of Williams
securing the Note.
The Company and Operator also entered into a Termination of Consulting and
Administrative Agreement (the "Termination") effective March 31, 1999. The
Termination had the effect of terminating the Consulting and Administrative
Agreement entered into between the Company and Operator on April 15, 1998 (the
"Consulting Agreement") pursuant to which the Company agreed to provide
consulting and administrative services relating to the daily management of each
of Operator's video poker casinos, and pursuant to which the Company received 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.
Williams and Operator also entered into a Second Amendment to Employment
Agreement (the "Employment Amendment") effective March 31, 1999 which amends the
Employment Agreement dated April 15, 1998 pursuant to which Williams received an
annual salary of $250,000, was eligible to participate in any employee benefit
plans of Operator, was furnished the use of a company automobile and was
reimbursed for expenses incurred on behalf of Operator during the course of his
employment. Under the Employment Amendment, Williams will receive an annual
salary of $100,000 and will continue to be eligible to participate in any
employee benefit plans of Operator, but will no longer be furnished the use of a
company automobile or be reimbursed for expenses. Under the Employment
Agreement, as amended by the Employment Amendment, the Employment Agreement
terminates on March 31, 2004.
As part of the Settlement Agreement, the Company and Operator have modified
the terms of the lease of the Gold Rush Truck Stop by the Company to Operator.
The Company and Operator have entered into a Lease Agreement (the "Lease")
effective March 31, 1999 for an initial term of six months and thereafter to be
a month-to-month lease until terminated by either party, with or without cause,
on 60 days' prior written notice. The Company will be responsible for major
repairs and Operator will be responsible for nonmajor repairs and maintenance,
and Operator will pay a rental of $33,333.33 per month for the term of the
Lease. The Company and Williams also mutually agreed to terminate the right of
first refusal previously granted to Williams to purchase the land and buildings
constituting the Gold Rush Truck Stop, or any portion thereof, if the Company
proposed to sell them to a third party. In conjunction with the Lease, the
Company has agreed to be solely responsible for the indebtedness to Regions
Bank, Springhill Branch, formerly known as Springhill Bank & Trust Company,
which is secured by a mortgage on the Gold Rush Truck Stop. As of December 31,
1998, the outstanding principal balance of such indebtedness was approximately
$613,000.
Pursuant to the Second Amendment, the parties agreed to delete the
requirement 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.
Effective March 31, 1999, all parties will be free to pursue any video poker
gaming opportunities they may desire without first offering the opportunity to
Operator or any other member. Likewise, Williams is no longer entitled to
receive a finder's fee of $50,000 for each opportunity brought by him to
Operator which is consummated by Operator.
As part of the Settlement Agreement, Williams and the Company also agreed
that to the extent any of the truck stop, convenience store, restaurant or
gaming interests that are part of King's Luck Lady, Pelican Palace, Lucky
Longhorn, The Diamond Jubilee or the Video Poker Tavern Route are held or
operated in the name of the Company, effective March 31, 1999 they shall be
deemed to be in the name of and operated by Operator.
Restructure of River Port Truck Stop, LLC. As part of the Amendment, the
Company and Williams agreed to form a new limited liability company called River
Port Truck Stop, LLC to pursue development, construction, ownership and
operation of the River Port Truck Stop in Port Allen, Louisiana. Initially,
River Port LLC was to be owned 50% by the Company and 50% by Williams, but it
was contemplated that additional equity partners could be admitted so that the
ownership interest of each of the Company and Williams would be reduced pro-rata
down to 40% each, with other equity partners owning 20%. Williams and the
Company agreed to seek financing to develop the River Port Truck Stop and other
equity partners. Pursuant to the Settlement Agreement, the Operating Agreement
of River Port LLC (the "River Port Operating Agreement") was also amended to
provide that it shall be managed by
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the members in the same manner as described above for Operator under its amended
Operating Agreement, and to provide that Williams will own 50% of the membership
interests and Sharing Ratios, and the Company will own 25% and one or more
members of the North Louisiana Group will own the remaining 25%. Other
conforming changes were made to make the River Port Operating Agreement
consistent with the Operating Agreement of Operator, as amended by the Second
Amendment. The amendments to the River Port Operating Agreement also became
effective March 31, 1999. The Company has also caused the existing lease
covering the River Port location to be assigned to River Port LLC.
Sublease of the Diamond Jubilee. Operator entered into a Sublease
Agreement (the "Casino Sublease") dated July 1, 1996 with New Orleans Video
Poker, Inc. ("NOVP"), a Louisiana corporation 50.1% owned by Williams and his
spouse and 29.5% owned by nine other stockholders of the Company, pursuant to
which Operator operates The Diamond Jubilee truck stop video poker casino in New
Orleans, Louisiana. NOVP, through various agreement with third parties, manages
the truck stop and related fuel operations and the restaurant. NOVP leases the
truck stop operations and the video poker casino from Stanley Doussan
("Doussan") pursuant to a Lease Agreement, Addendum to Lease and Sublease and
Operator's Agreement dated July 10, 1992, as amended by an Amendment to Lease
and Addendum to Lease dated December 15, 1992 (collectively, the "Operator's
Agreements"). The Operator's Agreements give NOVP the right to lease and
operate the truck stop and video poker casino for a period of 10 years
(commencing January 1, 1993). NOVP is required to pay rent to Doussan equal to
50% of the net receipts from the video poker devices (except for the first three
years Doussan agreed to reduce it to 40% unless NOVP recouped $300,000 of its
constructions costs prior to the end of such three year period). Net receipts
are defined to mean all money played in the devices less winnings paid out and
any tax or franchise fee payable to the state. NOVP is also required to pay an
escalating fixed monthly rental, which is currently $5,063 per month. Under the
terms of the Casino Sublease, which was consented to by Doussan, Operator leases
the video poker casino, bar, related parking area and one gasoline pump for a
term of one year, subject to automatic renewal for successive one year periods
at Operator's sole discretion, with a maximum of 30 one year renewals, provided
NOVP can terminate the Casino Sublease at any time if the sublease payments to
it fall below $5,000 per month after payment by Operator of various indebtedness
assumed by it. Since August 1998, cash flows have not been sufficient to
generate the minimum sublease payments and, therefore, NOVP can terminate the
Casino Sublease at any time. Operator agreed to pay rent to NOVP during the
term of the Casino Sublease equal to 50% of the net operating cash flow of
Operator from operations of the casino, after deducting all costs and expenses
of operations, interest and principal on indebtedness for furniture, fixtures or
equipment, and a reasonable reserve. Operator assumed approximately $53,000 of
indebtedness of NOVP as the purchase price for 50 video poker devices and an
automated teller machine. Operator also has an option to sublease the truck
stock and fuel operations and restaurant and purchase NOVP's 50% share of net
operating cash flow. The Company also issued 450,000 shares of Common Stock to
NOVP as partial consideration for NOVP entering into the Casino Sublease, and
granted piggy-back and demand registration rights to NOVP expiring July 1, 1998.
On August 4, 1998, Operator and NOVP agreed to purchase a Net Commercial
Lease Agreement ("Commercial Lease") from F&F Enterprises ("F&F"), the previous
operator of the truck stop and related fuel operations and the restaurant, for
the sum of $100,000 cash and the execution of a $30,000 promissory note. The
Commercial Lease provided for the operation of the truck stop, restaurant and
fuel operations at The Diamond Jubilee. Due to continued reductions in fuel
sales, The Diamond Jubilee Casino was in jeopardy of failing to qualify as a
truck stop under Louisiana regulations. As part of the purchase of the
Commercial Lease, Operator and NOVP settled all obligations to F&F regarding
operating losses (restaurant and fuel facilities), unpaid subsidies and unpaid
rents by Operator and NOVP through August 1, 1998. Doussan loaned Operator
$85,000 for this purchase which was repaid during the third quarter of 1998. In
addition, Doussan agreed to a Modification of Lease providing for a reduction in
the profit sharing payments due Doussan for a period of nine weeks during the
third quarter. The amount of these reductions totaled $85,000. In addition,
Operator has withheld an amount equal to $25,000 from NOVP's profit sharing
amounts as an additional contribution toward the purchase of the Commercial
Lease. Pursuant to an agreement dated May 15, 1998 between Operator and NOVP,
the parties agreed that the fuel operations at The Diamond Jubilee, previously
operated by F&F, would be managed by Operator. This agreement provides for the
monthly gasoline net proceeds (sales less fuel costs) to be remitted to NOVP.
In return, NOVP agrees to pay to Operator a base amount of $3,000 per month for
management of the fuel facilities plus an additional $600/month for each
increment of 10,000 gallons/month of fuel sales over 50,000/gallons per month.
Acquisition of GalaxSea and I.T. Cruise. On June 10, 1996, the Company
acquired 100% of the issued and outstanding capital stock of GalaxSea Cruises
and Tours, Inc. ("GalaxSea") and 100% of the issued and outstanding
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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 to
International 4,934,106 shares of Common Stock and 8,000,000 shares of Series B
Preferred Stock. The 8,000,000 shares of Series B Preferred Stock were entitled
to one vote for each share issued and voted together with the Common Stock as
one class, and not as a separate class (except where mandated by law). As a
result of this acquisition, International is the largest stockholder of the
Company, owning approximately 44% of the voting stock. Simultaneously with the
closing of the merger with GalaxSea, the Company also restructured its existing,
outstanding Class A Preferred Stock by redeeming 313,000 of the 1,600,000
outstanding shares for a $939,000 subordinated debenture, placing an agreed
moratorium on the accrual of dividends for two years and obtaining from the
holders of Class A Preferred stock the right to force conversion of the
remaining 1,287,000 shares of Class A Preferred Stock into 8,240,000 shares of
Common Stock at any time within the next two years. In the event of any such
forced conversion, as part of the merger transaction, International was granted
anti-dilution protection and will, upon the issuance of such shares of Common
Stock to the former holders of Class A Preferred Stock, be entitled to an
additional 5,452,854 shares of Common Stock without further consideration, in
order to maintain its percentage ownership of voting stock at 44%. 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 continued 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. As of March 31, 1999,
the Company was 26 principal payments in arrears (a total of $1,062,746 in
principal is past due; interest has not been paid since July 31, 1998, and an
aggregate of $56,600 in interest is past due). On March 22, 1999, International
agreed to allow the $1,119,346 then accrued and owed to it to continue to remain
outstanding (with interest accruing thereon) until the earlier of January 1,
2000 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,
2000, 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. As of March 31, 1999, 23 monthly payments,
for a total of $700,729 (after the redemption of debentures in accordance with
the Settlement Agreement), 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.
Overhead Sharing Agreement. The Company and International have agreed to
an overhead sharing arrangement pursuant to which the Company subleases
approximately 2,015 square feet of office space to International in the
Company's principal executive offices for a monthly rental of $1,595, and
reimburses International for the portion of the salaries of International's
employees attributable to services performed by them for GalaxSea and I.T.
Cruise. During 1998 and 1997, the Company paid $38,000 and $111,000,
respectively, in salary and employee reimbursements to International, and
International paid $19,100 in rent to the Company during both 1998 and 1997. In
1997, the Company performed certain accounting services for International and
was paid $13,000.
Guarantees of Indebtedness of River Port LLC. The Company has guaranteed
all of the $1,750,030 loan from Cottonport Bank to River Port LLC for
construction of the River Port Truck Stop, Williams and his spouse have
guaranteed $1,000,000 of such loan, and $750,000 is guaranteed by E.H. Hawes, II
and A. Keith Weber. The guarantee by Hawes and Weber is secured by a second
lien on the Company's Gold Rush property.
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Consulting Agreement. On May 16, 1997 (but to be retroactive to January 1,
1997), the Company entered into a Consulting Agreement with E.H. Hawes, II,
pursuant to which the Company paid Mr. Hawes $6,250 per month for providing
various consulting services to the Company. This Consulting Agreement was
terminated effective January 14, 1998 after Mr. Hawes was appointed Chairman of
the Board, President and Chief Executive Officer of the Company.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
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(a) The following documents are filed as part of this Annual Report on
Form 10-KSB:
1. Financial Statements: The financial statements filed as part of
this report are listed in the "Index to Financial Statements" on Page F-1
hereof.
2. Exhibits required to be filed by Item 601 of Regulation S-B:
Exhibit
Number Description of Exhibits
------ -----------------------
2.1 Restated Plan and Agreement of Merger, dated as of January
21, 1994, as amended and restated, by and between the
Company, OM Investors, Inc. ("OM") and a subsidiary of the
Company (without schedules) filed as Exhibit 2.1 to the
Company's Registration Statement on Form S-4, Registration
No. 33-79384, and incorporated herein by reference.
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 Quarterly Report on Form 10-QSB for the fiscal quarter
ended June 30, 1998 and incorporated herein by reference.
3.2 Amended and Restated Bylaws of the Company filed as Exhibit
3.2 to the Company's Quarterly Report on Form 10-QSB for the
fiscal quarter ended September 30, 1998, and incorporated
herein by reference.
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Exhibit
Number Description of Exhibits
------ -----------------------
10.1 The Company's Incentive Stock Option Plan, filed as Exhibit
10.7 to the 1986 Form 10-K and incorporated herein by
reference.
10.2.1 OM's Note in the original principal amount of $1,200,000
dated April 11, 1994 payable to Springhill Bank and Trust
Company filed as Exhibit 10.14.1 to the Form S-4 and
incorporated herein by reference.
10.2.2 Six Continuing Guaranty's of the Note referenced in Exhibit
10.14.1 dated October 21, 1993 filed as Exhibit 10.14.2 to
the Form S-4 and incorporated herein by reference.
10.3.1 OM's Note in the original principal amount of $331,000,
dated April 11, 1994, payable to Springhill Bank and Trust
Company filed as Exhibit 10.15.1 to the Form S-4 and
incorporated herein by reference.
10.3.2 Eight Continuing Guaranties of the Note referenced in
Exhibit 10.15.1 dated September 1, 1992 filed as Exhibit
10.15.2 to the Form S-4 and incorporated herein by
reference.
10.3.3 Six Continuing Guaranties of the Note referenced in Exhibit
10.15.1 dated June 22, 1993 filed as Exhibit 10.15.3 to the
Form S-4 and incorporated herein by reference.
10.4 Forms of ten OM Notes payable to stockholders dated various
dates filed as Exhibit 10.16 to the Form S-4 and
incorporated herein by reference.
10.5.1 Promissory Note in the original principal amount of $800,000
dated June 26, 1993 payable by D.M.L. Cattle Company, Inc.
and Dorothy M. Leach to Springhill Bank & Trust Company
filed as Exhibit 10.17.1 to the Form S-4 and incorporated
herein by reference.
10.5.2 Mortgage relating to the Promissory Note referenced in
Exhibit 10.17.2 filed as Exhibit 10.17.2 to the Form S-4 and
incorporated herein by reference.
10.5.3 Continuing Guaranty dated January 26, 1993 between OM and
Springhill Bank & Trust Company relating to the Promissory
Note referenced in Exhibit 10.17.1 filed as Exhibit 10.17.3
to the Form S-4 and incorporated herein by reference.
10.5.4 Continuing Guaranty dated January 26, 1993 between
Springhill Bank & Trust Company and eight OM stockholders
relating to the Promissory Note referenced in Exhibit
10.17.1 filed as Exhibit 10.17.4 to the Form S-4 and
incorporated herein by reference.
10.6 Shareholders' Agreement dated January 31, 1994 between
various stockholders of the Company and OM filed as Exhibit
10.18 to the Form S-4 and incorporated herein by reference.
10.7.1 Bill of Credit Sale with Vendor's Lien dated March 14, 1994
between OM and Delta Diversions, Inc. filed as Exhibit
10.19.1 to the Form S-4 and incorporated herein by
reference.
10.7.2 Promissory Note dated March 14, 1994 in the original
principal amount of $124,931.75 payable by OM to Delta
Diversions, Inc. filed as Exhibit 10.19.2 to the Form S-4
and incorporated herein by reference.
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Exhibit
Number Description of Exhibits
------ -----------------------
10.7.3 Security Agreement relating to Exhibit 10.19.2 filed as
Exhibit 10.19.3 to the Form S-4 and incorporated herein by
reference.
10.8.1 Conditional Sale Contract Promissory Note and Security
Agreement dated November 23, 1993 between OM and A.M.A.
Distributors, Inc. filed as Exhibit 10.20.1 to the Form S-4
and incorporated herein by reference.
10.8.2 Assignment dated November 22, 1993 relating to Exhibit
10.20.1 filed as Exhibit 10.20.2 to the Form S-4 and
incorporated herein by reference.
10.9.1 Conditional Sale Contract Promissory Note and Security
Agreement dated October 7, 1993 between OM and A.M.A.
Distributors, Inc. filed as Exhibit 10.21.1 to the Form S-4
and incorporated herein by reference.
10.9.2 Assignment dated September 27, 1993 relating to Exhibit
10.21.1 filed as Exhibit 10.21.2 to the Form S-4 and
incorporated herein by reference.
10.10.1 Conditional Sale Contract Promissory Note and Security
Agreement dated December 9, 1993 between OM and A.M.A.
Distributors, Inc. filed as Exhibit 10.22.1 to the Form S-4
and incorporated herein by reference.
10.10.2 Assignment dated December 9, 1993 relating to Exhibit
10.22.1 filed as Exhibit 10.22.2 to the Form S-4 and
incorporated herein by reference.
10.11 Conditional Sale Contract Promissory Note and Security
Agreement dated August 23, 1992 between OM and A.M.A.
Distributors, Inc. filed as Exhibit 10.23 to the Form S-4
and incorporated herein by reference.
10.12 Conditional Sale Contract Promissory Note and Security
Agreement dated August 23, 1992 between OM and A.M.A.
Distributors, Inc. filed as Exhibit 10.24 to the Form S-4
and incorporated herein by reference.
10.13.1 Conditional Sale Contract Promissory Note and Security
Agreement dated March 1, 1994 between OM and A.M.A.
Distributors, Inc. filed as Exhibit 10.25.1 to the Form S-4
and incorporated herein by reference.
10.13.2 Assignment dated February 28, 1994 relating to Exhibit
10.25.1 filed as Exhibit 10.25.2 to the Form S-4 and
incorporated herein by reference.
10.14.1 Operating and Financing Agreement dated July 21, 1993
between OM and Curray Corporation relating to the Pelican
Palace filed as Exhibit 10.27.1 to the Form S-4 and
incorporated herein by reference.
10.14.2 Letter Agreement dated September 21, 1993 between OM and
Mary Merrell Fountain relating to the Pelican Palace filed
as Exhibit 10.27.2 to the Form S-4 and incorporated herein
by reference.
10.14.3 Commercial Lease dated February 14, 1994 between Tobacco
Plus, Inc. and OM and Curray Corporation relating to the
Pelican Palace filed as Exhibit 10.27.3 to the Form S-4 and
incorporated herein by reference.
10.14.4 Lease dated February 18, 1994 between Albert and Jay, Inc.
and OM relating to the Pelican Palace filed as Exhibit
10.27.4 to the Form S-4 and incorporated herein by
reference.
-41-
<PAGE>
Exhibit
Number Description of Exhibits
------ -----------------------
10.14.5 Collateral Promissory Note dated July 21, 1993 in the
original principal amount of $1,450,000 payable by Curray
Corporation to OM filed as Exhibit 10.27.5 to the Form S-4
and incorporated herein by reference.
10.14.6 Collateral Mortgage dated July 21, 1993 between Curray
Corporation and OM relating to Exhibit 10.27.5 filed as
Exhibit 10.27.6 to the Form S-4 and incorporated herein by
reference.
10.14.7 Notarial Endorsement and Assignment of Note dated October
29, 1993 relating to Exhibit 10.27.5 filed as Exhibit
10.27.7 to the Form S-4 and incorporated herein by
reference.
10.14.8 Consent dated April 20, 1994 relating to the Pelican Palace
filed as Exhibit 10.14.1 to the Form S-4 and incorporated
herein by reference filed as Exhibit 10.27.8 to the Form S-4
and incorporated herein by reference.
10.15.1 Commercial Lease dated April 28, 1992 between OM and T.B.
Guillory, Inc. and Bill Guillory relating to King's Lucky
Lady filed as Exhibit 10.28.1 to the Form S-4 and
incorporated herein by reference.
10.15.2 Consent dated April 21, 1994 relating to King's Lucky Lady
filed as Exhibit 10.28.2 to the Form S-4 and incorporated
herein by reference.
10.16.1 Act of Contract and Agreement dated June 5, 1992 between The
Longhorn Club, Inc., The Longhorn Truck & Car Plaza, Inc.,
D.M.L. Cattle Company, Inc., Dorothy M. Leach, Charles R.
Cotton, Southern Trading Corporation and OM relating to the
Lucky Longhorn filed as Exhibit 10.29.1 to the Form S-4 and
incorporated herein by reference.
10.16.2 Amendment to Act of Contract and Agreement dated July 15,
1992, amending Exhibit 10.29.1 filed as Exhibit 10.29.2 to
the Form S-4 and incorporated herein by reference.
10.16.3 Act of Contract between OM and Southern Trading Corporation
dated June 5, 1992 relating to Exhibit 10.29.1 filed as
Exhibit 10.29.3 to the Form S-4 and incorporated herein by
reference.
10.16.4 Assignment dated February 15, 1993 between OM and Southern
Trading Corporation relating to Exhibit 10.29.1 filed as
Exhibit 10.29.4 to the Form S-4 and incorporated herein by
reference.
10.16.5 Assignment dated June 22, 1993 between OM and John F.
DeRosier relating to Exhibit 10.29.1 filed as Exhibit
10.29.5 to the Form S-4 and incorporated herein by
reference.
10.16.6 Consent dated May 1, 1994 relating to the Lucky Longhorn
filed as Exhibit 10.29.6 to the Form S-4 and incorporated
herein by reference.
10.17.1 Contract dated January 4, 1993 between Pat F. Willis, Jr.
and Blaine Guillory and Stelly's of LeBeau, Inc. relating to
Stelly's filed as Exhibit 10.30.1 to the Form S-4 and
incorporated herein by reference.
10.17.2 Contractual Agreement between OM, Pat F. Willis, Jr., Blane
Guillory, Stelly's of LeBeau, Inc. and Goudeau, Inc.
relating to Exhibit 10.30.1 filed as Exhibit 10.30.2 to the
Form S-4 and incorporated herein by reference.
-42-
<PAGE>
Exhibit
Number Description of Exhibits
------ -----------------------
10.17.3 Consent dated May 1, 1994 relating to Stelly's and Landry's
filed as Exhibit 10.30.3 to the Form S-4 and incorporated
herein by reference.
10.17.4 Letter Agreement dated December 26, 1995 between Stelly's of
LeBeau, Inc. and OM Operating, L.L.C. ("Operator") amending
Exhibit 10.30.1 filed as Exhibit 10.30.4 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1995 and incorporated herein by reference.
10.17.5 Assignment of Contracts dated March 21, 1993 between OM and
Pat F. Willis, Jr. and Blane Guillory relating to Exhibit
10.17.1 (Stelly's) filed as Exhibit 10.31.2 to the Form S-4
and incorporated herein by reference.
10.17.6 Addendum to Contract of Assignment dated December 28, 1995
between Operator and Pat F. Willis, Jr. and Blane Guillory
clarifying and amending the Assignment of Contracts filed as
Exhibit 10.17.5.
10.17.7 Promissory Note dated December 28, 1995 in original
principal amount of $81,000 payable to Operator by Blane
Guillory and other persons.
10.18.1 Amended and Restated Articles of Organization of OM
Operating, L.L.C. filed as Exhibit 10.32.1 to the Form S-4
and incorporated herein by reference.
10.18.2 Corrected Operating Agreement of OM Operating, L.L.C. filed
as Exhibit 10.32.2 to the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1994 and
incorporated herein by reference.
10.19.1 Stock Purchase Agreement dated effective November 1, 1995,
between the Company and certain shareholders of Ozdon
Investments, Inc. ("Ozdon") relating to the purchase of 93%
of the outstanding capital stock of Ozdon filed as Exhibit
10.1.1 to the Company's Current Report on Form 8-K dated
December 15, 1995 and incorporated herein by reference.
10.19.2 Form of Addendum No. One to the Stock Purchase Agreement
filed as Exhibit 10.33.1 filed as Exhibit 10.1.2 to the
Company's Current Report on Form 8-K dated December 15, 1995
and incorporated herein by reference.
10.19.3 Form of Stock Purchase Agreement dated effective November 1,
1995, relating to the remaining 7% of the capital shares of
Ozdon filed as Exhibit 10.2.1 to the Company's Current
Report on Form 8-K dated December 15, 1995 and incorporated
herein by reference.
10.19.4 Form of Addendum No. One relating to the Stock Purchase
Agreement filed as Exhibit 10.33.3 filed as Exhibit 10.2.2
to the Company's Current Report on Form 8-K dated December
15, 1995 and incorporated herein by reference.
10.19.5 Form of License to operate video poker casino dated
effective December 15, 1995 between the Company and Operator
relating to operation of the video poker casino at the Gold
Rush and the license of the sale of alcoholic beverages on
the premises filed as Exhibit 10.33.5 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1995 and incorporated herein by reference.
10.20 License Agreement dated effective December 15, 1995 between
the Company and Operator licensing sales of alcoholic
beverages at King's Lucky Lady filed as Exhibit 10.34 to the
Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1995 and incorporated herein by
reference.
-43-
<PAGE>
Exhibit
Number Description of Exhibits
------ -----------------------
10.21 License Agreement dated effective December 15, 1995 between
the Company and Operator licensing sales of alcoholic
beverages at the Pelican Palace filed as Exhibit 10.35 to
the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1995 and incorporated herein by
reference.
10.22 Option Agreement dated November 1, 1994 between the Company
and George J. Akmon representing 210,000 shares of Common
Stock filed as Exhibit 10.36 to the Company's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1995
and incorporated herein by reference.
10.23 Option Agreement dated January 17, 1996 between the Company
and George J. Akmon representing 500,000 shares of Common
Stock filed as Exhibit 10.37 to the Company's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1995
and incorporated herein by reference.
10.24 Option Agreement dated January 17, 1996 between the Company
and Richard P. Crane, Jr. representing 500,000 shares of
Common Stock filed as Exhibit 10.38 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31,
1995 and incorporated herein by reference.
10.25.1 Stock Purchase and Registration Rights Agreement dated July
1, 1996 between the Company and New Orleans Video Poker
Company, Inc. ("NOVP"), filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-QSB for the fiscal
quarter ended September 30, 1996 and incorporated herein by
reference.
10.25.2 Sublease Agreement dated July 1, 1996 between OM Operating
Company, LLC ("Operating") and NOVP filed as Exhibit 10.1.2
to the Company's Quarterly Report on Form 10-QSB for the
fiscal quarter ended September 30, 1996 and incorporated
herein by reference.
10.25.3 Consent to Sublease entered into as of October 7, 1996, by
and between Operating, NOVP and Stanley Doussan filed as
Exhibit 10.1.3 to the Company's Quarterly Report on Form 10-
QSB for the fiscal quarter ended September 30, 1996 and
incorporated herein by reference.
10.26 License to Operate Video Poker Casino dated effective
December 15, 1995 between Operating and Ozdon Investments,
Inc., relating to The Gold Rush Truck Stop filed as Exhibit
10.2 to the Company's Quarterly Report on Form 10-QSB for
the fiscal quarter ended September 30, 1996 and incorporated
herein by reference.
10.27.1 Agreement and Plan of Merger dated effective June 7, 1996,
relating to the acquisition of GalaxSea and I.T. Cruise
filed as Exhibit 10.1.1 to the Company's Current Report on
Form 8-K dated June 10, 1996 and incorporated herein by
reference.
10.27.2 Form of Note dated June 10, 1996 in the original principal
amount of $1,400,000 payable by the Company to International
relating to the acquisition of I.T. Cruise filed as Exhibit
10.1.2 to the Company's Current Report on Form 8-K dated
June 10, 1996 and incorporated herein by reference.
10.27.3 Form of Security Agreement dated effective June 10, 1996
between International and the Company securing repayment of
the Note filed as Exhibit 10.27.2 filed as Exhibit as 10.1.3
to the Company's Current Report on Form 8-K dated June 10,
1996 and incorporated herein by reference.
-44-
<PAGE>
Exhibit
Number Description of Exhibits
------ -----------------------
10.27.4 Form of GalaxSea Cruise Marketing Agreement dated May 1,
1996 between International and GalaxSea filed as Exhibit
10.1.5 to the Company's Current Report on Form 8-K dated
June 10, 1996 and incorporated herein by reference.
10.27.5 Form of Cruise Marketing Agreement dated May 1, 1996 between
International and I.T. Cruise filed as Exhibit 10.1.6 to the
Company's Current Report on Form 8-K dated June 10, 1996 and
incorporated herein by reference.
10.27.6 Form of Assignment between International and I.T. Cruise
dated June 1, 1996 filed as Exhibit 10.1.7 to the Company's
Current Report on Form 8-K dated June 10, 1996 and
incorporated herein by reference.
10.27.7 Form of Security Agreement dated June 10, 1996 between the
Company, Ozdon Investments, and Lamar E. Ozley, Jr., as
Trustee for the former shareholders of Ozdon Investments,
Inc. filed as Exhibit 10.1.8 to the Company's Current Report
on Form 8-K dated June 10, 1996 and incorporated herein by
reference.
10.28.1 Lease Agreement dated January 17, 1997 between S.W. Day and
T. Joe Calloway and River Port Truck Stop, Inc. (a
subsidiary of the Company) filed as Exhibit 10.28.1 to the
Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1996 and incorporated herein by
reference.
10.29 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 fiscal quarter ended June 30, 1998 and
incorporated herein by reference.
10.30 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 fiscal quarter ended June 30, 1998 and
incorporated herein by reference.
10.31 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 fiscal
quarter ended June 30, 1998 and incorporated herein by
reference.
10.32 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 fiscal
quarter ended June 30, 1998 and incorporated herein by
reference.
10.33 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 fiscal quarter ended June 30,
1998 and incorporated herein by reference.
10.34 Amendment No. One to Operating Agreement of OM Operating,
L.L.C. dated effective April 15, 1998 filed as Exhibit 10.1
to the Company's Current Report on Form 8-K dated April 15,
1998 and incorporated herein by reference.
10.35 Note dated April 15, 1998 in the original principal amount
of $4,000,000 payable to the Company by Williams filed as
Exhibit 10.2 to the Company's Current Report on Form 8-K
dated April 15, 1998 and incorporated herein by reference.
10.36 Assignment and Security Agreement dated April 15, 1998
between the Company and Williams filed as Exhibit 10.3 to
the Company's Current Report on Form 8-K dated April 15,
1998 and incorporated herein by reference.
-45-
<PAGE>
Exhibit
Number Description of Exhibits
------ -----------------------
10.37 Consulting and Administrative Agreement dated April 15, 1998
between the Company and Operator filed as Exhibit 10.4 to
the Company's Current Report on Form 8-K dated April 15,
1998 and incorporated herein by reference.
10.38 Employment Agreement dated April 15, 1998 between Operator
and Williams filed as Exhibit 10.5 to the Company's Current
Report on Form 8-K dated April 15, 1998 and incorporated
herein by reference.
10.39 Release and Settlement Agreement dated February 2, 1999 by
and among the parties referenced therein, together with
various Exhibits thereto (but exclusive of various Schedules
thereto) filed as Exhibit 10.1 to the Company's Current
Report on Form 8-K dated February 1, 1999 and incorporated
herein by reference.
10.40 Settlement Agreement dated February 2, 1999 by and among the
parties referenced therein filed as Exhibit 10.2 to the
Company's Current Report on Form 8-K dated February 1, 1999
and incorporated herein by reference.
*10.41 Convenience Store and Restaurant Sub-Lease dated January 10,
1999 between RVC Operations, L.L.C. and River Port Truck
Stop, LLC.
*10.42 Fuel Service and Truck Stop Operating Agreement dated
January 10, 1999 between RVC Operations, L.L.C. and River
Port Truck Stop, LLC.
16.1 Letter from Arthur Andersen LLP addressed to the Securities
and Exchange Commission dated December 10, 1998 filed as
Exhibit 16.1 to the Company's Current Report on Form 8-K
dated December 4, 1998 and incorporated herein by reference.
*21.1 Subsidiaries of the Company.
*27.1 Financial Data Schedule required by Item 601 of Regulation
S-B.
- --------------------
* Filed herewith.
b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated October 20, 1998
reporting the information under the following Form 8-K Items:
Item 5. Other Events
The Company also filed a current report on Form 8-K dated December 4, 1998
reporting information under the following Form 8-K items:
Item 4. Changes in Registrant's Certifying Accountant
Item 7. Financial Statements and Exhibits
No financial statements were included in either Form 8-K. No other reports
on Form 8-K were filed during the fourth quarter of 1998.
-46-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) 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
April 9, 1999 By: /s/ E. H. Hawes, II, President
-----------------------------------
E. H. Hawes, II, President
and Chief Executive Officer
(Principal Executive Officer and
Principal Financial and Accounting
Officer)
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated.
April 9, 1999 /s/ E. H. Hawes, II
---------------------------------------
E.H. Hawes, II
Director (Chairman)
April 9, 1999 /s/ Daryl N. Snadon
---------------------------------------
Daryl N. Snadon
Director
April 9, 1999 /s/ Richard P. Crane, Jr.
---------------------------------------
Richard P. Crane, Jr.
Director
-47-
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
================================================================================
Page
----
Independent Auditors' Report F-2
Independent Auditors' Report F-3
Financial Statements:
Consolidated Balance Sheet - December 31,1998 F-4
Consolidated Statements Of Operations - Years Ended
December 31, 1998 And 1997 F-5
Consolidated Statements Of Stockholders' Deficit - Years Ended
December 31,1998 And 1997 F-6
Consolidated Statements Of Cash Flows - Years Ended
December 31, 1998 And 1997 F-7-F-8
Notes To Consolidated Financial Statements F-9-F-27
F-1
<PAGE>
Independent Auditors' Report
To the Stockholders
North American Gaming and Entertainment Corporation
We have audited the accompanying consolidated balance sheet of North American
Gaming and Entertainment Corporation (a Delaware corporation) and Subsidiaries
as of December 31, 1998, and the related consolidated statements of operations,
stockholders' deficit and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of North
American Gaming and Entertainment Corporation and Subsidiaries as of December
31, 1998, and the results of their operations and their cash flows for the year
then ended in conformity with generally accepted accounting principles.
/s/ Sartain Fischbein & Co.
February 17, 1999, except for Notes 8 and
10 which the date is March 31, 1999
Tulsa, Oklahoma
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
North American Gaming and Entertainment Corporation:
We have audited the accompanying consolidated statement of operations,
stockholders' equity (deficit) and cash flow of North American Gaming and
Entertainment Corporation (a Delaware corporation) and subsidiaries for the year
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flow of
North American Gaming and Entertainment Corporation and subsidiaries for the
year ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ Arthur Anderson LLP
New Orleans, Louisiana,
March 12, 1998
F-3
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
======================================================================================================
December 31, 1998
- ------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Current Assets:
Cash $ 183,205
Restricted cash 97,904
Accounts receivable, net of allowance for doubtful accounts of $54,240 270,525
Inventories, at cost 123,090
Prepaid expenses 47,809
Notes receivable - current 39,166
Deferred tax asset 30,000
-----------
Total Current Assets 791,699
-----------
Property And Equipment, net of accumulated depreciation 945,127
-----------
Other Assets:
Deposits 100,893
Long-term deferred tax asset 378,000
Revenue interest rights 90,176
Trade name and intangibles, net of accumulated amortization 125,608
Goodwill, net of accumulated amortization 643,098
Casino and truck stop under construction 1,604,923
Assets of business transferred under contractual agreement 675,488
-----------
Total Other Assets 3,618,186
-----------
Total Assets $ 5,355,012
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable and accrued liabilities $ 1,114,966
Notes payable - current 2,357,498
Preferred stock dividends payable 780,000
-----------
Total Current Liabilities 4,252,464
Liabilities of business transferred under contractual agreement 770,215
Notes Payable - long-term 1,446,749
-----------
Total Liabilities 6,469,428
-----------
Commitments And Contingencies
Stockholders' Deficit:
Class A preferred stock, $3.00 par value, 10% annual cumulative dividend,
1,600,000 shares authorized, no shares issued and outstanding -
Preferred stock, $.01 par value, 10,000,000 shares authorized
Series "B", 8,000,000 shares designated, no shares issued and outstanding -
Common stock, $.01 par value, 100,000,000 shares authorized, 41,788,552
shares issued and outstanding 417,886
Additional paid-in capital 466,959
Accumulated deficit (1,999,261)
-----------
(1,114,416)
-----------
Total Liabilities and Stockholders' Deficit $ 5,355,012
===========
</TABLE>
F-4
================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
======================================================================================================
Years Ended December 31, 1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue:
Video poker $15,704,231 $14,947,240
Truck stop and convenience store 8,679,063 7,553,400
Cruise 966,442 1,305,402
----------- -----------
25,349,736 23,806,042
----------- -----------
Costs And Expenses:
Video poker:
Cost of revenue 8,871,204 8,574,423
Depreciation and amortization 219,909 335,324
----------- -----------
9,091,113 8,909,747
----------- -----------
Truck Stop and Convenience Store:
Cost of revenue 7,065,399 6,304,179
Depreciation and amortization 64,896 59,215
----------- -----------
7,130,295 6,363,394
----------- -----------
Cruise:
Cost of revenue 417,610 671,313
Depreciation and amortization 332,950 346,492
----------- -----------
750,560 1,017,805
General and administrative 7,776,346 7,078,853
Depreciation and amortization 13,239 12,990
----------- -----------
Operating Income 588,183 423,253
Interest Expense (307,187) (336,211)
Other Income (Expense) (494,767) 67,780
----------- -----------
(Loss) Income Before Provision For Income Taxes (213,771) 154,822
Provision For Income Taxes (39,979) (218,200)
----------- -----------
Net Loss $ (253,750) $ (63,378)
=========== ===========
Basic Loss Per Share $ (.01) $ *
=========== ===========
Basic Weighted Average Shares Outstanding 31,980,331 20,095,698
=========== ===========
</TABLE>
* Less than $.01 per share.
F-5
================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
================================================================================================================
Years Ended December 31, 1998 and 1997
- ----------------------------------------------------------------------------------------------------------------
Additional
Class A Preferred Paid-in Total
Preferred Stock Common Capital Accumulated Stockholders'
Stock Series "B" Stock (Deficit) Deficit Deficit
------------ ----------- -------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ 3,861,000 $ 80,000 $200,957 $(3,257,112) $(1,682,133) $ (797,288)
Net loss - 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 1,287,000 shares
of Class A preferred stock
into 8,240,000 shares of
common stock (3,861,000) - 82,400 3,778,600 - -
Conversion of 8,000,000 shares
of preferred stock Series "B"
into 8,000,000 shares of
common stock - (80,000) 80,000 - - -
Issuance of 5,452,854 shares of
common stock in connection
with an anti-dilution provision
- - 54,529 (54,529) - -
Net loss - 1998 - - - - (253,750) (253,750)
----------- ---------- -------- ----------- ----------- -----------
Balance, December 31, 1998 $ - $ - $417,886 $ 466,959 $(1,999,261) $(1,114,416)
=========== ========== ======== =========== =========== ===========
</TABLE>
F-6
================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
===============================================================================
Years Ended December 31, 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss $ (253,750) $ (63,378)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 630,994 729,009
Deferred tax expense 39,978 110,500
Loss on disposal of assets 73,976 -
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable 72,260 (55,587)
Inventories 12,685 (70,346)
Prepaid insurance 29,891 5,002
Deposits 33,959 (75,280)
Increase (decrease) in:
Accounts payable and accrued liabilities 180,144 307,111
----------- ---------
Net Cash Provided By Operating Activities 820,137 887,031
----------- ---------
Cash Flows From Investing Activities:
Purchases of property, plant and equipment (123,292) (228,742)
Advances on notes receivable - (5,045)
Repayments by borrowers 1,866 126,010
Purchase of intangibles (7,410) -
Cash and restricted cash transferred under
contractual agreement (292,582) -
Construction of casino and truck shop (1,604,923) -
----------- ---------
Net Cash Used In Investing Activities (2,026,341) (107,777)
----------- ---------
Cash Flows From Financing Activities:
Proceeds from borrowings 1,465,409 66,664
Payments on borrowings (593,808) (778,700)
----------- ---------
Net Cash Provided by (Used In) Financing Activities 871,601 (712,036)
----------- ---------
Net (Decrease) Increase In Cash (334,603) 67,218
Cash, beginning of year 615,712 548,494
----------- ---------
Cash, end of year $ 281,109 $ 615,712
=========== =========
Cash Paid During The Year For:
Income taxes, net of refunds received $ 107,550 $ 148,128
Interest $ 204,440 $ 273,052
</TABLE>
F-7
================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
Years Ended December 31, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Non-Cash Investing and Financing Activities:
During 1998, the Company classified the following assets and liabilities as
transferred under contractual agreement (see Note 2):
<S> <C>
Cash $190,682
Restricted cash 101,900
Accounts receivable 18,899
Inventories 16,128
Prepaid expenses 16,626
Notes receivable 8,500
Property and equipment, net 211,980
Revenue interest rights 93,857
Deposits 16,916
--------
Assets of business transferred under contractual agreement $675,488
========
Accounts payable and accrued liabilities $409,655
Notes payable 360,560
--------
Liabilities of business transferred under contractual agreement $770,215
========
</TABLE>
The Company converted 1,287,000 shares of class A Preferred Stock and
8,000,000 shares of Preferred Stock Series "B" into 16,240,000 shares of
common stock. In connection with the conversion, the Company issued an
additional 5,452,854 shares of common stock under an anti-dilution provision
(see Note 9).
F-8
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
================================================================================
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
The accompanying consolidated financial statements include the accounts of North
American Gaming and Entertainment Corporation, a Delaware corporation (NAGEC),
its wholly owned subsidiaries, Ozdon Investments, Inc. (OI), GalaxSea Cruises
and Tours, Inc. ("Galexsea"), I.T. Cruise, Inc. ("IT") and River Port Truck
Stop, Inc. (RPI) (collectively, the Company) and consolidated minority interests
in OM Operating, LLC (OM), and River Port Truck Stock, LLC (RPLLC) (See Note 2).
The Company's operations for the year ended December 31, 1998 consisted of the
truck stop facilities and/or video poker casinos in six truck stops, and the
video poker devices for a route of 4 bars and restaurants, all located in the
state of Louisiana. The Company also operates in the cruise travel business.
Use of Estimates: The preparation of consolidated financial statements in
- -----------------
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Reclassifications: Certain reclassifications have been made to the December 31,
- ------------------
1997 consolidated financial information in order to conform to the 1998
presentation. The reclassifications had no effect on the 1997 net loss.
Video Poker Revenue: Video poker revenue is the net revenue from gaming
- --------------------
activities, defined as the difference between gaming wins and losses.
Cash: Restricted cash not included in "Assets of business transferred under
- -----
contractual agreement" is considered as cash for cash flow purposes.
Restricted Cash: The Louisiana State Police regulations regarding Video Draw
- ----------------
Poker require the Company to maintain a minimum balance at all times in their
gaming account equivalent to 15% of the previous month's net device revenues or
to secure the account by a line of credit or bond. The Company meets this
requirement by maintaining the required minimum balance in their gaming account.
A portion (51%) of restricted cash is included in "Assets of business
transferred under contractual agreement" in the accompanying consolidated
balance sheet.
Inventories: Inventories, which consists of food, beverage, fuel and
- ------------
convenience store items, are stated at the lower of cost or market; cost is
determined by the average cost method.
F-9
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
================================================================================
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Property and Equipment: Expenditures for property and equipment are recorded at
- -----------------------
cost. Improvements which extend the economic life of such assets are
capitalized. Expenditures for maintenance and repairs are charged to expense.
Depreciation is provided over the estimated useful lives of assets, which range
from 5 to 31.5 years, using an accelerated method for financial accounting
purposes.
Intangibles: Intangibles, which consist of goodwill, trade names and contract
- ------------
rights are recorded at cost and are amortized over their estimated useful lives
ranging from 5 to 9 years.
Revenue Interest Rights: Revenue interest rights consist of costs to acquire a
- ------------------------
fixed percentage of revenues (see Note 10) and are being amortized on a
straight-line basis over the term of the related agreements.
Long-Lived Assets: Long-lived assets to be held and used in the Company's
- ------------------
business are reviewed for impairment, whenever events or changes in
circumstances indicate that the related carrying amount may not be recoverable.
When required, impairment losses on assets to be held and used are recognized
based on the fair value of the asset.
Concentration: Video poker revenue represents approximately 62% and 63% of the
- --------------
Company's operating revenue for the years ended December 31, 1998 and 1997
respectively. Failure to comply with Louisiana gaming regulations regarding
Video Poker could result in license revocation (see Note 8).
Basic Earnings Per Share: Basic earnings per share of common stock was computed
- -------------------------
by dividing income applicable to common stockholders, by the weighted average
number of common shares outstanding for the year. Diluted earnings per share
are not presented because the Company has incurred losses in 1998 and 1997 and
therefore, any potential common shares are anti-dilutive.
Fair Value of Financial Instruments: The carrying amounts of financial
- ------------------------------------
instruments including cash, receivables, prepaids, notes receivable, accounts
payable and accrued expenses approximated fair value as of December 31, 1998
because of the relatively short maturity of these instruments.
The carrying amounts of notes payable and debt issued approximate fair value as
of December 31, 1998 because interest rates on these instruments approximate
market interest rates.
F-10
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
================================================================================
2. CONSOLIDATED MINORITY INTERESTS
OM Operating L.L.C. (OM): In 1994 the Company contributed to OM (the Operator)
- -------------------------
its assets and liabilities related to the operation of the video draw poker
gaming devices. Donald I. Williams (Williams) an employee of the Company,
contributed $100 to the Operator as his capital contribution. OM was formed to
facilitate compliance with Louisiana law which requires the operator of video
poker devices in truck stops to be at least majority owned by Louisiana
residents.
Through April 15, 1998, the Company received a gross income allocation equal to
20% of OM's gross gaming income generated from the operation of the video poker
gaming devices. Gross gaming income is defined as total money played in all
devices, less all payouts on winnings to players and less all gaming and device
taxes and fees payable to the State of Louisiana.
Application of the above provisions of the Operating Agreement of OM resulted in
100% of the net income being allocated to the Company and 0% being allocated to
Williams for the period from January 1, 1998 to April 15, 1998 and the year
ended December 31, 1997.
Effective April 15, 1998, the Company and Williams entered into Amendment Number
One (the "Amendment") to the Operating Agreement of OM.
The Company contributed to OM its right to the 20% gross income allocation in
exchange for 99% of the ownership interest in OM, and simultaneously assigned
50% of the ownership interests in OM to Williams in exchange for a $4,000,000
nonrecourse note (the "Note") payable by Williams to the Company. Immediately
thereafter Williams owned 51% and the Company owned 49% of the ownership
interests in OM, the Company no longer has the 20% gross income allocation and
Williams owes the Company $4,000,000 pursuant to the Note. The Note is payable
solely from cash flow distributions made by OM to Williams from five video poker
casinos, truck stops, and route operations operated by the Company and OM (less
an amount to allow Williams to pay his federal and state income taxes on OM's
net taxable income), 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, truck stops and route operations. The principal balance of the Note is
automatically reduced pro-rata (at percentages agreed upon based on 1997 net
operating income of each of the five locations) if OM loses the right to operate
any of the five locations.
Until the Note is paid in full, the Company has the right to remove and appoint
a new manager of Operator with the concurrence of Williams, and must at the
request of Williams remove and replace any such manager who fails to
satisfactorily perform his dutires. Once the Note has been paid in full, the
manager will be elected by the owners of at least 65% of the ownership interest
in OM.
In conjunction with the restructuring of OM, the Company and OM entered into a
five year Consulting and Administrative Agreement (see Note 10) pursuant to
which the Company will receive a fee of $400,000 per year.
F-11
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
================================================================================
2. CONSOLIDATED MINORITY INTERESTS (CONTINUED)
Additionally, Williams and OM entered into a five year Employment Agreement
pursuant to which Williams will receive an annual salary of $250,000 (see Note
10).
The Company agreed to lease to OM the land and buildings constituting The Gold
Rush Truck Stop for payments of $400,000 per year expiring April 15, 2008 (see
Note 10).
Under the Amendment, Williams and the Company are allocated 51% and 49%,
respectively, of the profits and losses of OM after deducting Williams' salary,
the consulting fee and rent on the Gold Rush Truck Stop. The allocated profits
of Williams are payable to the Company as a reduction of accrued interest on the
Note and then principal until such time as Williams allocation of profits is
sufficient to pay-off the Note.
Application of the above provisions of the Amendment resulted in 100% of the net
income being allocated to the Company and 0% to Williams for the period from
April 15, 1998 to December 31, 1998. The principal balance outstanding on the
Note at December 31, 1998 remains at $4,000,000.
The restructure under the Amendment 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. Because of this, the assignment transaction and resulting $4,000,000
Note are not reflected in the consolidated financial statements. The Company
will continue to consolidate the operations of OM until significant payments are
made on the Note.
In accordance with generally accepted accounting principles, 51% of the assets
and liabilities of OM are segregated as "Assets/Liabilities of business
transferred under contractual agreement" in the accompanying consolidated
balance sheet.
The assets and liabilities of OM transferred under the contractual agreement as
of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
51% Interest
ASSETS in OM
------------
<S> <C>
Cash $191,000
Restricted cash 102,000
Accounts receivable 19,000
Prepaid expenses 16,000
Notes receivable 8,000
Inventories 16,000
--------
Total Current Assets 352,000
Property and equipment, net 212,000
Intangbiles and other, net 111,000
--------
TOTAL ASSETS $675,000
========
</TABLE>
F-12
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
================================================================================
2. CONSOLIDATED MINORITY INTERESTS (CONTINUED)
<TABLE>
<CAPTION>
LIABILITIES
<S> <C>
Accounts payable/accrued liabilities $410,000
Notes payable - current 150,000
--------
Total Current Liabilities 560,000
Notes payable - long term 210,000
--------
TOTAL LIABILITIES $770,000
========
</TABLE>
River Port Truck Stop,LLC (RPLLC): The Company and Williams agreed to form
- ----------------------------------
RPLLC to pursue development, construction, ownership and operation of a truck
stop and video poker facility. RPLLC is owned 49.9% by the Company and 50.1% by
Williams.
In May 1998, RPI assigned RPLLC its lease on a truck stop facility and, on July
21, 1998, the Company and Williams entered into an Operating Agreement to govern
the operations of RPLLC. Until the Note is paid in full, the Company has the
right to remove and appoint a new manager of RPLLC 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 RPLLC.
In conjunction with the Operating Agreement of RPLLC, the Company and RPLLC
entered into a five year Consulting and Administrative Agreement (see Note 10)
pursuant to which the Company will receive a fee of $50,000 per year.
Additionally, Williams, RPLLC and Operator also entered into an Amendment to the
Employment Agreement (see Note 10) pursuant to which Williams agreed to perform
the same services for RPLLC as he is performing for the Operator under the
Employment Agreement and pursuant to which OM and RPLLC agree to split his
annual salary of $250,000 pro rata based on the number of truck stop video poker
casinos operated by each entity.
Williams and the Company are allocated 50.1% and 49.9%, respectively of the
profits and losses of RPLLC. Notwithstanding the above, each members'
distributive share of income, gain, loss, deduction or credit shall be allocated
to the Company and Williams' first to member accounts in order to cause the
accounts to approximate the 49.9% and 50.1% ownership percentages, respectively,
and then in proportion to the members' respective ownership percentage.
Application of the above provisions of the RPLLC Operating Agreement resulted in
100% of the net losses being allocated to the Company and 0% to Williams for the
period from July 21, 1998 to December 31, 1998.
F-13
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
================================================================================
2. CONSOLIDATED MINORITY INTERESTS (CONTINUED)
Restructure of OM and RPLLC Subsequent to December 31, 1998: In order to
- ------------------------------------------------------------
respond to additional concerns of the Louisiana gaming regulators (see Note 8)
related to the Amendment to the Operating Agreement and the RPLLC Operating
Agreement, the Company and Williams executed Amendment Number Two to the
Operating Agreement and Amendment Number One to the RPLLC Operating Agreement in
February 1999 ("the Amendments").
The Amendments will be effective April 1, 1999 and will cancel the Note and the
Company's contribution of the 20% gross income allocation. In addition,
Williams has agreed to cancel his subordinated debenture in the amount of
$103,651 (including accrued interest), return an aggregate of 2,553,000 shares
of common stock of the Company owned by Williams and entities related to
Williams, to cancel $78,000 of accrued dividends on Class A Preferred Stock,
contribute .1% interest in RPLLC to the Company, and pay the Company cash
ranging from $150,000 to $300,000. The Amendments terminate the Company's 20%
gross income allocation in OM and cause it to contribute operating assets and
liabilities of two truck stops and three restaurants to OM as of March 31, 1999.
Thereafter, all profit and loss of OM and RPLLC will be allocated to the members
based on each members' ownership as detailed below.
Concurrent with the Amendments, the Company entered into an agreement with 10
former Class A Preferred Stockholders (former stockholders) whereby the Company
agreed to transfer 50% of its interest in all gaming operations (including OM,
RPLLC, and the Gold Rush Truck Stop) to the former stockholders. In
consideration, the former stockholders have agreed to cancel their subordinated
debentures in the amount of $338,837 (including accrued interest), return an
aggregate of 5,614,632 shares of common stock, cancel $255,072 of accrued
dividends on Class A Preferred Stock, and assume 50% of the $612,651 note
payable to bank (See Note 6).
As of April 1, 1999, ownership of OM, RPLLC and the Gold Rush Truck stop will be
as follows:
<TABLE>
<CAPTION>
Former
Company Stockholders Williams Total
------------------- ------------------- --------------- ---------------
<S> <C> <C> <C> <C>
OM 24.5% 24.5% 51.0% 100.0%
RPLLC 25.0% 25.0% 50.0% 100.0%
The Gold Rush Truck Stop 50.0% 50.0% - 100.0%
</TABLE>
The Amendments constitute a transfer of ownership interest and control in all of
the Company's gaming operations. The transfer will become effective April 1,
1999. At that time, the Company will record its investment in OM, RPLLC and the
gold Rush Truck Stop under the equity method.
F-14
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
================================================================================
2. CONSOLIDATED MINORITY INTERESTS (CONTINUED)
The assets and liabilities of OM (including the truck stop and restaurant assets
and liabilities to be subsequently contributed), RPLLC and the Gold Rush Truck
Stop as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Gold
ASSETS OM RPLLC Rush Total
-------------- ----------------- --------------- --------------
<S> <C> <C> <C> <C>
Cash $ 395,000 $ - $ 3,000 $ 398,000
Accounts receivable 110,000 2,000 88,000 200,000
Restricted cash 200,000 - - 200,000
Prepaid expenses 33,000 7,000 - 40,000
Inventories 66,000 6,000 66,000 138,000
Notes receivable 17,000 - - 17,000
Property and equipment, net 585,000 3,000 498,000 1,086,000
Casino and truck stop under construction - 1,605,000 - 1,605,000
Intangibles and other, net 344,000 7,000 24,000 375,000
---------- ---------- -------- ----------
Total Assets $1,750,000 $1,630,000 $679,000 $4,059,000
========== ========== ======== ==========
LIABILITIES
Accounts payable and accrued liabilities $ 803,000 $ 129,000 $ - $ 932,000
Notes payable 707,000 1,465,000 - 2,172,000
---------- ---------- -------- ----------
Total Liabilities $1,510,000 $1,594,000 $ - $3,104,000
========== ========== ======== ==========
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment (net of $211,980 included in "Assets of business
transferred under contractual agreement") include the following at December 31,
1998:
<TABLE>
<S> <C>
Land $ 10,000
Buildings 256,388
Leasehold Improvements 736,856
Furniture and Equipment 1,213,276
Vehicles 54,959
-----------
2,271,479
Less Accumulated Depreciation (1,326,352)
-----------
Property and Equipment - Net $ 945,127
===========
</TABLE>
F-15
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
================================================================================
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities (net of $409,655 included in
"Liabilities of business transferred under contractual agreement") as of
December 31, 1998 include the following:
<TABLE>
<S> <C>
Trade accounts payable and other $ 834,149
Accrued payroll and payroll taxes 92,544
Accrued interest payable 188,273
----------
$1,114,966
==========
</TABLE>
5. INCOME TAXES
The Company uses the asset and liability method of accounting for income taxes.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the consolidated financial statement carrying amounts of existing assets and
liabilities and their respective tax consolidated basis. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. The Company files a consolidated U. S. Federal tax return. OM
and PRLLC are not subject to income taxes. Income or loss is required to be
included in the income tax returns of the members.
The components of the provision for income taxes as shown on the accompanying
consolidated statements of operations are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1998 1997
---------------- ---------------------
<S> <C> <C>
Current- Federal $ - $ 48,647
Current-State - 59,053
Deferred 39,979 110,500
------- --------
$39,979 $218,200
======= ========
</TABLE>
Components of the net deferred tax asset at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards $1,137,000
Vacation accrual 21,000
Other, net 9,000
----------
Total deferred tax assets 1,167,000
Less - valuation allowance (759,000)
----------
Net deferred tax assets $ 408,000
==========
</TABLE>
F-16
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
================================================================================
5. INCOME TAXES (CONTINUED)
At December 31, 1998, the Company had a net operating loss carryforward
available for Federal income tax purposes of approximately $3,222,000. Because
of tax rules relating to changes in corporate ownership, the utilization by the
Company of these benefit carryforwards in reducing its tax liability is
restricted to a cumulative annual utilization of approximately $330,000. The
amounts of operating loss carryforwards expire in varying amounts through 2008.
Due to the uncertainty of realization and the annual restriction discussed
above, a deferred tax asset valuation allowance has been provided.
The following is a reconciliation of the U. S. statutory tax rate to the
Company's effective rate for the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Statutory rate (34.0)% 34.0%
Goodwill amortization 50.7 72.7
State income taxes - 49.3
Other 2.0 (15.1)
-------- --------
Company's effective rate 18.7% 140.9%
========= ========
</TABLE>
6. NOTES PAYABLE
<TABLE>
<S> <C>
December
31, 1998
-----------
Note payable to a bank, interest at 8.5%, secured by The Gold Rush Truck Stop real
estate and guaranteed by certain stockholders. $312,452 is included in "Liabilities
of business transferred under contractual agreement" in the accompanying consolidated
balance sheet. $ 612,651
Note payable to International Tours, Inc. ("International") a stockholder, interest at
9%, payable in monthly installments of $50,000. Loan collateralized by security
interest in 100% of the stock of GalaxSea and IT Cruise. 1,062,746
Notes payable to certain stockholders, interest of 9%, payable in equal monthly
installments until maturity on June 1, 2003. The notes are unsecured.
896,346
Note payable to a bank, interest of 10.25% due December 10,1999. The note is
collateralized by the RPLLC accounts receivable, inventory and the casino and truck
stop under construction and is guaranteed by certain stockholders of the Company.
1,465,409
Other, including $48,108 included in "Liabilities of business transferred under
contractual agreement" in the accompanying consolidated balance sheet. 127,653
---------------
4,164,807
Less: Notes payable transferred under contractual agreement (360,560)
Less: Current Portion (2,357,498)
---------------
Long-Term Portion $ 1,446,749
===============
</TABLE>
F-17
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
================================================================================
6. NOTES PAYABLE (CONTINUED)
The amounts due in subsequent years are as follows:
<TABLE>
<CAPTION>
Notes Payable
Transferred Under
Notes Contractual
December 31, Payable Agreement Total
------------ ---------- ----------------- ----------
<S> <C> <C> <C>
1999 $2,357,498 $150,568 $2,508,066
2000 907,097 135,787 1,042,884
2001 314,678 72,252 386,930
2002 224,974 1,953 226,927
---------- -------- ----------
Total $3,804,247 $360,560 $4,164,807
========== ======== ==========
</TABLE>
Debt Restructuring: As of December 31, 1998, the Company was in arrears in
- -------------------
payments to International, a related party, 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 December 31, 1998, and is secured by a pledge of the
outstanding capital stock of I.T. Cruise and GalaxSea. The Company is current
in payment of all other indebtedness and payables except as discussed below.
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 amounts accrued and owed to
it to continue to remain outstanding (with interest accruing thereon) until the
earlier of January 1, 2000 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, 2000, at which time the $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 no longer in
arrears, all payments will be suspended on the subordinated debentures issued by
the Company which have aggregate remaining principal balances of $896,346 at
December 31, 1998. These notes require aggregate payments of principal and
interest of $16,670 per month, and are expressly made subordinate to the
International note as well as other senior debt of the Company.
As discussed in Note 2 subsequent to year end, in connection with the
restructuring of the gaming operations and transfer of a portion of the
Company's gaming interest, certain holders of $442,488 of subordinated
debentures (including accrued interest) have agreed to cancel the debentures.
F-18
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
================================================================================
7. RELATED PARTY TRANSACTIONS
International owns 44% of the total common stock of the Company. The Company
subleases space in its corporate office to International receiving rents of
$19,100 in 1998 and 1997. Several employees of International also perform
duties for GalaxSea and IT Cruise. The Company has an agreement under which it
reimburses International for services provided by its employees. Payments under
this agreement were approximately $38,000 and $111,000 in 1998 and 1997,
respectively. In 1997, the Company performed certain accounting services for
International and received $13,000. In 1998 and 1997, 5 and 4 franchise
locations of International were converted to franchises of GalaxSea,
respectively.
At December 31, 1998, the Company holds a note receivable from International
totaling $31,000. Additionally, there is $27,186 of payables to International
at December 31, 1998 in "Trade accounts payable".
During 1998 and 1997 the Company paid a significant stockholder consulting fees
totaling $63,125 and $68,750, respectively.
The Company's gaming operations are located in south central and southwest
Louisiana. Substantially all of the Company's customers reside in eastern Texas
or southern Louisiana. A change in general economic conditions or the extent
and nature of regulations enabling gaming in Louisiana or Texas could adversely
effect future operating results of the Company.
The Company's operations in Louisiana depend on the continued licensing and
qualifications of the Company and OM and RPLLC under the laws enacted in the
State of Louisiana. Such licensing and qualifications are reviewed periodically
by the Louisiana gaming regulators.
8. CONCENTRATIONS, COMMITMENTS AND CONTINGENCIES
License Renewal Process: The Louisiana gaming regulators (the "Regulators")
- ------------------------
have undertaken to review of all licensees operating video poker casinos. The
Regulators have reviewed the ownership structure of the Company's video poker
operations under the Amendment (see Note 2) and has expressed concerns whether
such structure satisfies the Louisiana residency requirements necessary to
operate video poker casinos. As a result, the Company was given until February,
1999 to restructure the ownership of OM and RPLLC. As a result, the Amendments
were agreed to in February 1999 and given to the Regulators for review (also see
Note 2). The Company believes its structure is satisfactory, but there can be
no assurance that the Regulators will concur. If the Company's ownership
structure is not found to satisfy the residency requirements, the Company may
have its license revoked. A revocation of the Company's license would have a
material adverse effect on the Company's business operations and financial
condition.
The Regulators require the truck stop owner to maintain an "Establishment
License". The holder of the Establishment License is required to maintain
control over the truck stop's fuel operations. If any truck stop owners have
their Establishment License revoked, it would have a material adverse efect on
the Company's business operations and financial condition.
F-19
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
================================================================================
8. CONCENTRATIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
King's Lucky Lady: As discussed in Note 10, the initial term of the lease for
- ------------------
King's Lucky Lady expired on April 30, 1997. The Company was notified by the
lessor of his intention to terminate the lease. On March 3, 1998, the Court
issued a judgment which deemed the lease invalid, effective April 30, 1997, and
required the Company to vacate the property. The Company has appealed this
judgment. Since April 30, 1997 the Company had been depositing 50% of net cash
from operations from the King's property into an escrow account. Condition to
filing an appeal, the Company provided a $250,000 letter of credit in lieu of an
appeal bond, and effective March 3, 1998 began depositing 100% of all net
operating cash flows in an escrow account. The Company recorded a charge to
operations and deposited in escrow the net cash from operations generated by
King's Lucky Lady of $503,395 and $139,660 for the years ended December 31, 1998
and 1997, respectively. In March, 1999, the Company lost its final appeal and
is required to vacate the premises by April 1, 1999. Effective March 31, 1999,
the Company settled the dispute with the lessor and as a result, the lessor will
receive the escrowed funds and the Company will sell its casino operating asset
and inventory to the lessor for $325,000. The accompanying consolidated balance
sheet does not include the escrowed cash, which totaled $643,055 at December 31,
1998. The charges to operations are included in other expenses in the
consolidated statements of operations. King's Lucky Lady accounted for 23% and
24% of the Company's gaming and truck stop revenues for 1998 and 1997,
respectively, which revenue stream will be lost in the second quarter of 1999.
Diamond Jubilee: By agreement, the Company subleases the Diamond Jubilee truck
- ----------------
stop and casino facilities for 50% of the net operating cash flows (see Note
10). The lessor, New Orleans Video Poker, an entity partially owned by
Williams, can terminate the lease without notice if the lease payments are less
than $5,000 per month for five consecutive months. Since August 1998, the cash
flows are not sufficient to allow lease payment of the minimum and therefore,
the lease can be terminated at any time. Diamond Jubilee accounted for 12% of
gaming and truck stop revenues in 1998, and should the lease be terminated, this
revenue stream would be lost.
Louisiana Regulations: According to the regulations established by the
- ----------------------
Regulators for video draw poker machines, the licensed facility's primary
business annual gross revenue shall exceed the facility's video gaming annual
gross revenue. For the period ended December 31, 1998 and 1997, the Company was
in violation of this regulation. This regulation was not being enforced in 1998
and 1997. Currently, gaming laws in effect do not contain a provision similar
to this regulation, and the Regulators have informally indicated that it does
not plan to enforce any of its regulations that are not based on express
statutory provisions. Management presently anticipates that the Regulators will
continue to choose not to enforce this regulation.
The franchise payment payable to the State of Louisiana in 1998 and 1997 equals
32.5% of net gaming device revenue for truck stop casinos and 26% of net gaming
device revenue for devices placed in bars and restaurants.
F-20
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
================================================================================
8. CONCENTRATIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Louisiana legislature adopted minimum fuel sale requirements for qualified
truck stops effective July 1, 1994. The fuel sale requirements dictate the
number of video poker devices that may be operated at the truck stop, based on
average monthly sales. As of December 31, 1998, four of the five Company gaming
facilities meet the monthly fuel sales requirements to keep the maximum 50
machines allowed. However, fuel sales at the Diamond Jubilee location are only
sufficient to maintain 35 video poker machines. It is possible the property may
face additional loss of machines in the future.
Cash: The Company maintains cash balances with financial institutions which
- -----
periodically exceeds FDIC limits.
In the opinion of management, there are no other contingent claims or litigation
against the Company which would materially affect its consolidated financial
position.
9. STOCKHOLDERS' DEFICIT
Preferred Stock
- ---------------
The Company has approved the authorization of 10,000,000 shares of preferred
stock with attributes as determined by the Board of Directors.
The Company also has a class of 1,600,000 shares of Class A Preferred Stock.
The Class A Preferred Stock has a par value of $3.00, bears a 10% annual
cumulative dividend, payable monthly and is convertible into common stock on a 1
to 1 basis.
The Class A Preferred Stock is redeemable at the option of the Company and
carries a liquidation preference of $3.00 per share.
In connection with the 1996 acquisition of GalaxSea and IT Cruise, the Company
redeemed 313,000 shares of Class A Preferred Stock, obtained an agreement to
discontinue accruing dividends for two years and changed the conversion ratio
into common stock to 6.4 to 1.
Additionally, in connection with the acquisitions, the Board of Directors
created a new series of preferred stock, Preferred Stock Series "B". The
maximum shares under the series is 8,000,000. The Preferred Stock Series B has
a par value of $.01, accrues no dividends and converts on a 1 to 1 basis into
common stock.
During 1998, the Company converted 1,287,000 shares of Class A Preferred Stock
and 8,000,000 shares of Preferred Stock Series B into 8,240,000 and 8,000,000
shares of common stock, respectively.
F-21
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
================================================================================
9. STOCKHOLDERS' DEFICIT (CONTINUED)
In conjunction with the conversion of the preferred stock, the Company issued
5,452,854 shares of common stock to International under the terms of an anti-
dilutive provision in the I.T. Cruise and GalaxSea purchase agreements. As the
issuance of the stock maintains the value of the shares issued in the
acquisition, the shares were recorded as a reduction of paid in capital at their
par value.
Restrictions on Ownership
- -------------------------
The Company's Certificate of Incorporation restricts ownership of the common and
preferred stock of the Company in order to comply with applicable gaming
statutes. Persons who are not suitable to be stockholders of the Company under
such statutes may not own common or preferred stock of the Company. Further,
any stockholder may be required, at such stockholder's expense, to make filings
with applicable gaming authorities to determine suitability, and if found not
suitable will be required to dispose of such stockholder's stock and will not be
entitled to vote or receive distributions pending such disposal.
Stock Options
- -------------
The Company granted an officer options to purchase 210,000 shares of common
stock for $.80 per share. The options expired in 1997.
During 1996, the Company granted an officer and one of its directors options to
purchase 500,000 shares each of common stock for $.30, share. The shares were
fully vested as of the date of the grant and expire five years from the date of
the grant. No options to purchase the Company's stock were issued during 1998
and 1997.
The following is a table of options granted:
<TABLE>
<CAPTION>
Exercise
Price Per
Options Share
------------- ------------
<S> <C> <C>
Balance, December 31, 1996 1,210,000 $.30-.80
Expired (210,000) $ .80
--------- --------
Balance, December 31, 1997 1,000,000 $ .30
Granted - $ -
--------- --------
Balance, December 31, 1998 1,000,000 $ .30
========= ========
</TABLE>
The Corporation has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized for the
stock options. There is no proforma effect in 1998 or 1997 as the Company
granted no options during those years.
F-22
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
================================================================================
10. CONTRACTS
The Company currently has six gaming and/or truck stop establishments as well as
video poker route operations in Louisiana. The Company's gaming contracts
assign various percentages of the gaming revenues of these establishments to
various property owners, lessors or lenders. When the Company enters into a
contract with an establishment, it acquires the right to place gaming devices in
the establishment's truck stop facilities or bars. These agreements provide the
establishments and route operators a percentage of the net gaming income. In
addition, the Company has a revenue sharing agreement on a single location (Gold
Rush) which operates similar to the other gaming contracts, but the Company owns
the truck stop facility. Below is a listing of the gaming contracts the Company
has at December 31, 1998, and a definition of terms used.
Net Gaming Income: Video poker revenue less state franchise fees and device
- ------------------
fees.
Route Operators: Individuals who count, report, and deposit the gaming income.
- ----------------
Route Operations: The Company has gaming contracts with bars and restaurants.
- -----------------
These contracts provide the establishment's owners with 50% of the net gaming
income, and the route operator with 25% of the net gaming income. The contracts
expire in 1999 and are not expected to be renewed.
King's Lucky Lady: In April 1992, the Company signed an agreement for the lease
- ------------------
of the King's Truck Stop in Port Barre, Louisiana. This lease was for a term of
five years beginning on May 1, 1992, with monthly rental payments of 20% of the
net revenue from the video poker machines. The Company had an option to renew
the lease for three additional five-year terms, subject to the parties
negotiating a percentage rental for the renewal period acceptable to both
parties. Minimum future rentals cannot be estimated since future revenues are
not known, nor has a percentage been negotiated.
See discussion at Note 8 of the Company's loss of the right to operate the video
poker casino at King's Lucky Lady effective April 1, 1999.
The Lucky Longhorn Club: During 1993, the Company purchased the right to
- ------------------------
operate the gaming devices of this establishment. Revenue interest rights
included in the accompanying consolidated balance sheet (including $93,857
included in "Assets of business transferred under contractual agreement") are
related to this purchase and the Diamond Jubilee below. (See Note 1.) The
Company is bound by the terms of an agreement signed by the previous owner on
June 2, 1992, which is for a period of ten years and provides for the
establishment's owners to receive 50% of the net gaming income. In connection
with the 1998 settlement of a previous dispute, the Company is required to pay
the property owners $3,000 per month through October 1999.
F-23
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
================================================================================
10. CONTRACTS (CONTINUED)
Pelican Palace: The Company lent approximately $1,450,000 to Curray Corporation
- ---------------
during 1994 for the construction of a truck stop in Vinton, Louisiana. Curray
Corporation started construction in 1993 and in 1994, when the construction was
completed, the Company began operating 50 video poker machines under a five year
operating agreement. Under the operating agreement with Curray, 70% of the net
profit from the premise's operations were dedicated to repayment of the loan
from the Company with the remainder split 50% to each party. After the note was
paid in full, the revenues were split 50% to each party. The operating
agreement allows for three, five year renewal options.
In addition, the Company has agreed to pay 2% of its share of net profits to an
unrelated third party for a finders fee.
Gold Rush Truck Stop: The Company owns this truck stop facility in addition to
- ---------------------
operating the gaming devices.
The Company is required, to pay a former lender ten percent (10%) of net gaming
income as long as the Company continues to operate the gaming establishment in
St. Landry Parish, Louisiana. In addition, in the event that OI is sold to an
unrelated party, the agreement provides for the former lender to receive ten
percent (10%) of the proceeds from the sale in excess of $265,000.
Diamond Jubilee: The Company issued 450,000 shares of the Company's common
- ----------------
stock to New Orleans Video Poker, Inc. (NOVP) on July 1, 1996 in exchange for
the right to operate the gaming devices of this establishment. The common stock
issued in conjunction with the acquisition was recorded as revenue interest
rights at $81,450, the historical basis of net assets acquired. The Company and
NOVP were related parties at the time of the acquisition. The Company subleases
the facility from NOVP. The sublease agreement requires that the Company pay
NOVP an amount equal to 50% of the net operating cash flow from the truck stop
and casino after deductions for (i) all cash costs and expenses paid by the
Company and (ii) interest and principal on any indebtedness of the Company on
any furniture, fixtures, and equipment placed in the video poker casino, bar, or
parking lot.
In August, 1998, the Company and NOVP purchased the rights to operate the truck
stop fuel operations and restaurant. Under the agreement, the Company operates
the facility, pays NOVP the proceeds from net fuel sales and receives a $3,000
per month management fee. The Company receives an additional $600 per month for
each increment of 10,000 gallons per month of fuel sales over 50,000 gallons per
month.
See discussion at Note 8 of the Company's possible termination of the sublease.
F-24
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
================================================================================
10. CONTRACTS (CONTINUED)
RPLLC: In January 1997, RPI entered into an agreement to lease a truck stop
- ------
facility for a period of 50 years. The terms of the lease call for monthly base
rent of $7,000 plus Additional Rent of ten percent (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 five percent (5%) and that commencing with the twenty-fifth (25th)
month of video poker operations that the Additional Rent would be ten percent
(10%) of Net Revenue. RPI assigned the lease to RPLLC in 1998. The Company is
currently in the process of building a new video gaming facility, truck stop and
convenience store and in anticipation of its opening in the first quarter of
1999, closed the existing truck stop and convenience store in December 1998.
The construction is being financed with a note payable due in December 1999 (see
Note 6).
Subsequent to December 31, 1998, RPLLC entered into a fifteen year operating
agreement with a third party to operate the convenience store, restaurant and
truck stop once construction is complete. The operating fees due RPLLC for the
truck stop are based on gallons of gasoline sold and an escalating base rent for
the convenience store. The operator is also responsible for its share of common
area costs.
Rent expense under the gaming leases was as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Kings Lucky Lady $ 347,923 $ 318,901
The Longhorn Club 1,255,451 1,185,440
Pelican Palace 660,149 611,740
Gold Rush Truck Stop 209,575 201,568
Diamond Jubilee 790,766 920,516
RPLLC 84,000 44,000
---------- ----------
$3,347,864 $3,282,165
========== ==========
</TABLE>
Consulting Agreements: In April 1998, the Company entered into a four year
- ----------------------
consulting agreement with OM. The agreement requires OM to pay the Company an
annual consulting fee of $400,000.
In July 1998, the Company entered into a consulting agreement with RPLLC. The
agreement required RPLLC to pay the Company an annual consulting fee of $50,000.
Subsequent to December 31, 1998, in conjunction with the restructuring of OM and
RPLLC, the agreements were terminated effective April 1, 1999 (see Note 2).
F-25
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
================================================================================
10. CONTRACTS (CONTINUED)
Employment Agreement: In April 1998, OM entered into a four year employment
- ---------------------
agreement with Williams. The agreement required OM to pay Williams $250,000 per
year for services provided.
In July 1998, the agreement was amended to require RPLLC to pay a proportionate
share of the salary to Williams.
Subsequent to December 31, 1998, in conjunction with the restructuring of OM and
RPLLC, the annual salary was reduced effective April 1, 1999 to $100,000 per
year.
Gold Rush Truck Stop Lease: In April 1998, the Company entered into a ten year,
- ---------------------------
triple net lease with OM to lease the truck stop and casino assets to OM. The
lease calls for annual base rent of $400,000.
Gold Rush Truck Stop Lease: Subsequent to December 31, 1998, in conjunction
- ---------------------------
with the restructuring of OM and RPLLC, the lease was terminated effective April
1, 1999 and the Company entered into a new six month lease with OM. The new
lease requires OM to pay the Company $33,333 per month through September 1999.
11. EMPLOYEE BENEFIT PLAN
The Company adopted a 401(k) plan effective, January 1, 1998. Participation is
voluntary and employees are eligible to participate upon attaining age 21 and
completing one year of employment with the Company. The Company provides no
matching contribution but may make a discretionary contribution which vests over
six years. The Company made no discretionary contributions for the year ended
December 31, 1998.
12. LEASE COMMITMENTS
The Company leases office space under noncancellable operating leases expiring
through September 2001. One of the locations is subleased to an unrelated third
party. Rent expense (net of sublease income) for the years ended December 31,
1998 and 1997 was approximately $67,000 and $65,000, respectively. Future
minimum lease payments, net of sublease payments, for the remaining terms of the
leases are as follows:
<TABLE>
<CAPTION>
Year ending
December 31,
- ------------
<S> <C>
1999 $ 47,840
2000 47,840
2001 31,893
--------
$127,573
========
</TABLE>
F-26
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
================================================================================
13. SEGMENTS
The Company's operations are classified into two reportable segments that
provide different services. Separate management of each segment is required
because each business is subject to different operating strategies.
The first segment is the operation of video poker machines, restaurants and
convenience stores in truck stops in Louisiana. The second segment derives it
revenue from commissions and monthly fees related to the sales of cruise
vacations. There are no other segments.
The following is a summary of segment information as of December 31, 1998:
<TABLE>
<CAPTION>
Segment 1 Segment 2 Corporate Total
---------------- --------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Revenues $24,383,294 $ 966,442 $ - $25,349,736
Interest expense 306,652 835 - 307,187
Depreciation and amortization 284,805 332,950 13,239 630,994
Net income (loss) 645,617 (186,981) (712,386) (253,750)
Assets 3,970,705 317,523 1,106,762 5,394,990
Expenditures for long-lived assets 1,714,785 7,644 13,196 1,735,625
</TABLE>
F-27
================================================================================
<PAGE>
EXHIBIT 10.41
CONVENIENCE STORE AND RESTAURANT SUB-LEASE
1) PARTIES: This Convenience Store and Restaurant Sub-Lease (the
"Lease") dated effective the ________________ day of _______________, 199__, is
entered into by and between RVC Operations, L.L.C. (hereinafter "Lessee") and
RIVER PORT TRUCK STOP, L.L.C. (hereinafter "Lessor") both entities represented
by their duly authorized officers pursuant to resolutions, which are attached
hereto and made a part hereof who agree that in consideration of the rental
stated herein and their mutual covenants, Lessor hereby sub-leases to Lessee and
Lessee hereby leases from Lessor, on the terms and conditions herein, the
following described premises (hereinafter "the Property"):
a) A tract of land containing 5.65 acres situated in West Baton Rouge Parish,
Louisiana in Section 93, Township 7 South, Range 12 East and which said tract is
described as:
. Commencing at a point which is the most northerly point of the
property herein described and which said point is marked by a half
inch iron pipe and has coordinates (Louisiana Plane Coordinate System
(South Zone ) of X- 2, 027, 809.477 and Y -647, 046.059;
. Thence run South 61 35' 56" East a distance of 98.97 feet to a point;
. Thence run South 32" 33' 47" East a distance of 194.43 feet to a
point;
. Thence run South 09 22' 26" East a distance of 164.00 feet to a point;
. Thence run South 61 53' 52" East a distance of 151.21 feet to a point;
. Thence run South 09 21' 45" East a distance of 180.00 feet to a point,
which is the most easterly point of the property herein conveyed;
. Thence run South 89 49' 49" West a distance of 261.93 feet to a point;
. Thence run South 00 10' 11" East a distance of 42.31 feet to a point;
. Thence run South 89 49' 49" West a distance of 300.00 feet to a point;
. Thence run North 00 10' 11" West a distance of 399.66 feet to a point;
. Thence run North 34 22' 35" East a distance of 322.15 feet to the
point of commencement.
. All as is more fully shown on a plan of survey prepared by Edward E.
Evans & Associates, Inc., and dated January 5, 1973, revised February
28, 1973, a copy of which is annexed hereto and made a part hereof,
further revised April 5, 1973.
. Being a portion of the same property acquired by Vendor from Port
Properties, Inc. (In Liquidation) by instrument dated August 1, 1969,
registered in Conveyance Book No. 108, Entry No. 174 of the records of
West Baton Rouge Parish, Louisiana.
and
b) A tract of land containing 2.23 acres of land in Section 93, Township 7
South, Range 12 East and which said tract is described as:
1
<PAGE>
. Commencing at a point marked by a half inch iron pipe and which said
point is the Southwest corner of the property herein described;
. Thence run North 8949' 49" East a distance of 300 feet to a point;
. Thence run North 0010' 11" West a distance of 323.80 feet to a point;
. Thence run South 8949' 49" West a distance of 300 feet to a point;
. Thence run South 0010' 11" East a distance of 323.80 feet to the point
of commencement;
. All as is more fully shown on a plan of survey prepared by Edward E.
Evans & Associates, Inc., and dated January 5, 1973, revised February
28, & April 5, 1973, a copy of which is annexed hereto;
. Being a portion of the same property acquired by Vendor and Port
Properties, Inc. (In Liquidation) by instrument dated August 1, 1969,
registered in Conveyance Book No. 108, Entry No. 174 of the records of
West Baton Rouge Parish, Louisiana.
2) TERM: The initial Lease term is for FIFTEEN (15) YEARS, effective
____________________________________ (the "Effective Date") and terminating on
____________________. Notwithstanding the Effective Date, this Lease shall not
become effective until Lessee receives a "CLASS A-GENERAL RETAIL PERMIT" and a
"CLASS A- RESTAURANT PERMIT", as defined in Part II of Chapter 2 of Title 26 of
the Louisiana Revised Statutes of 1950 (the "Act"); and any and all federal,
state, parish or city licenses and permits necessary to operate a "QUALIFIED
TRUCK STOP FACILITY", as defined in the Act. An "Option to Renew" this Lease is
also provided herein for an additional FIFTEEN (15) YEARS based on the same
terms and conditions provided for during the initial term with the starting Base
Monthly Installments 6% above the amount paid during the 15th year.
3) RENTAL: Lessee agrees to pay Lessor, without deduction, off-set, prior
notice, or demand, rent in the form of Base Monthly Installments and Override
Percentage Rent, as such terms are defined below:
Base Monthly Installments during the term hereof are payable on the first day of
each month in advance. The Base Monthly Installments shall commence on the
first day of the seventh month after the Effective Date (the "Rental
Commencement Date") and shall be in the amounts set forth in the following table
for each year of the Lease term, plus a Consumer Price Index (CPI) adjustment,
which will be applied at three year intervals, based on the difference between
the CPI for Port Allen, Louisiana at the Rental Commencement Date and the CPI
for Port Allen on each such anniversary of the Rental Commencement Date (except
that Base Monthly Installments shall never be reduced as a result of the CPI
Adjustment.
BASE RENT
---------
YEAR ANNUAL AMOUNT CPI ESTIMATED
-----------------------------------------------
2
<PAGE>
1 42,000
2 84,000
3 84,000
4 96,000 1.05
5 96,000
6 96,000
7 100,800 1.05
8 100,800
9 100,800
10 105,840 1.05
11 105,840
12 105,840
13 111,132 1.05
14 111,132
15 111,132
The first Base Monthly Installment of rent shall be due and payable on the
Rental Commencement Date during the demised term, and all succeeding
installments of rent shall be payable on or before the first day of each
succeeding calendar month during the demised term.
Override Percentage Rent (herein so called) is also payable during the demised
term in the amount determined by the formula illustrated below for the
following categories: (A) an Override Based on Convenience Store and Restaurant
Sales for each twelve month period of the Lease, which shall mean the gross
receipts from sales at or from the convenience store and restaurant; and (B) an
Override based on Gross Sales from Fuel, Convenience Store and Restaurant Sales
in excess of $5 million for each twelve month period of the Lease, which shall
mean the gross receipts from sales at or from the fuel pumps, convenience store
and restaurant. It is the intention of the parties that the sales described
above in (A) and (B) are mutually exclusive in that the sales are not calculated
twice.
(A) OVERRIDE ON C-STORE/RESTAURANT SALES
----------------------------------------
INCREMENTAL CUMM. % EST.$ EST. CUMM.
SALES SALES OVERRIDE OVERRIDE $ OVERRIDE
- -------------- ---------- -------- -------- ----------
Up to $750,000 $ 750,000 - $ - $ -
Next 150,000 900,000 0.50% 750 750
Next 150,000 1,050,000 1.00% 1,500 2,250
Next 150,000 1,200,000 1.50% 2,250 4,500
Next 150,000 1,350,000 2.00% 3,000 7,500
Next 150,000 1,500,000 3.00% 4,500 12,000
Next 150,000 1,650,000 4.00% 6,000 18,000
3
<PAGE>
Next 150,000 1,800,000 5.00% 7,500 25,500
Max 150,000 1,950,000 6.00% 9,000 34,500
(B) GROSS C-STORE SALES
-----------------------
DIESEL GASOLINE C-STORE & TOTAL 1.50% OVER
SALES SALES REST SALES RETAIL SALES $5,000,000
- ----------- ----------- ----------- ------------ ----------
$ 1,605,000 $ 840,000 $ 750,000 $ 3,195,000 $ -
1,926,000 1,008,000 900,000 3,834,000 -
2,247,000 1,176,000 1,050,000 4,473,000 -
2,568,000 1,344,000 1,200,000 5,112,000 1,680
2,889,000 1,512,000 1,350,000 5,751,000 11,265
3,210,000 1,680,000 1,500,000 6,390,000 20,850
3,531,000 1,848,000 1,650,000 7,029,000 30,435
3,852,000 2,016,000 1,800,000 7,668,000 40,020
3,852,000 2,016,000 1,800,000 7,668,000 40,020
3,852,000 2,016,000 1,800,000 7,668,000 40,020
3,852,000 2,016,000 1,800,000 7,668,000 40,020
3,852,000 2,016,000 1,800,000 7,668,000 40,020
3,852,000 2,016,000 1,800,000 7,668,000 40,020
3,852,000 2,016,000 1,800,000 7,668,000 40,020
3,852,000 2,016,000 1,800,000 7,668,000 40,020
- -----------------------------------------------------------------
$48,792,000 $25,536,000 $22,800,000 $97,128,000 $ 384,390
All Override Percentage Rent will be due ten (10) days after the end of each
calendar month payable after the first month of operation, and will be subject
to audit by the Lessor or its agents, who shall have the right, on demand, to
review Lessee's state sales tax returns, all cash register data, including
computer files, tapes and receipts, all bank deposits and all records pertaining
to verification of pricing of goods available for sale relative to the cost of
goods sold, to ensure the accurate recording of all sales for cash, credit card
and accounts receivable transactions.
All amounts due Lessor hereunder are payable to the order of RIVER PORT TRUCK
STOP, L.L.C. and shall be delivered to Lessor or its agent at 13150 COIT ROAD,
DALLAS, TEXAS, 75240, or as Lessor or its successors or assigns may hereafter
from time to time designate in writing pursuant to the Notice clause set forth
herein.
4) SECURITY DEPOSIT: On the Effective Date, there shall be due and
payable by Lessee a security deposit in an amount of SEVEN THOUSAND-FIVE HUNDRED
DOLLARS ($7,500) to be held for the performance by Lessee of Lessee's covenants
and obligations under this Lease. It is understood that the deposit shall not
be considered an advance payment of rental or a
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measure of Lessor's damage in case of default by Lessee or breach by Lessee of
Lessee's covenants under this Lease. Lessor may, from time to time, without
prejudice to any other remedy, use the security deposit to the extent necessary
to make good any event of default or breach of covenant of Lessee, and any
remaining balance of the security deposit shall be returned by Lessor to Lessee
upon termination of this Lease.
5) DELIVERY OF PREMISES: Lessee hereby agrees to accept the premises in
its existing condition, except for liability for environmental contamination
pre-existing the Effective Date hereof and except for remedial costs to clean-up
any pre-existing environmental contamination. With the environmental exception
above, Lessee assumes responsibility for the condition of the leased premises
thereafter the Effective Date. Any additional improvements or alterations
desired by Lessee thereafter shall be at Lessee's cost, with Lessor's prior
written approval, except as hereinafter provided.
6) TAXES: In addition to the rental provided above, Lessee shall pay
each month, in a Common Area Maintenance (CAM) sur-charge (the "CAM Charge"),
which represents an allocated portion of the real estate taxes and assessments,
general and special, levied or imposed, with respect to said land and buildings,
including any additions to the Property, which for the purposes hereof shall be
deemed to include related parking facilities and all the improvements to said
building, as estimated by Lessor. In the month of December of each year, Lessor
shall furnish Lessee with a statement providing the amount of taxes levied
against the land, building and improvements, and Lessee's share of said tax, and
the amount of the tax paid by Lessee during the prior year. Lessor's statement
shall include a copy of the tax bills for the year and a check or bill for any
over or under payment for said taxes.
In addition to all other payments required to be paid by Lessee to Lessor,
Lessee shall pay in the same manner as set forth in the preceding paragraph all
rental, sales and use taxes, if any, levied or imposed with respect to the
leased premises or this Lease and all other taxes, charges, assessments and
governmental impositions, extraordinary or otherwise, of every nature and kind,
which may, during the lease term, be assessed, levied, or imposed, upon the
leased premises, or any part thereof, or any improvements thereon, or the
leasing thereof. However, nothing herein shall be construed to require Lessee
to pay inheritance, estate, or income tax imposed upon Lessor.
7) KIND OF BUSINESS: Lessee shall occupy the Property throughout the
full term of the Lease, and the principal business to be conducted includes the
operation of a convenience store and restaurant as required by State Gaming
Regulations to enable Lessor to operate a video poker casino with the maximum
number of video poker gaming devices permitted by law (which is currently 50
devices and/or such other gaming devices as may subsequently be allowed by law).
In addition to the hold harmless and indemnity in Article 19(E), Lessee agrees
to comply with, hold harmless, indemnify and defend Lessor from any violations
of all laws, regulations, or ordinances relative to Lessee's use of the
premises. Lessee will fully comply with all laws and regulations applicable to
Lessee's use and operation of the Premises, including, but not limited to, Video
Draw Poker Devices Statute (La. R.S. 33:4862.6 (A) (4) (a)) pertaining to the
requirements of a
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"QUALIFIED TRUCK STOP FACILITY" ( Attachment "B"). Lessee will maintain
qualified retailer status for TEXACO products during the full term of this
Lease.
8) ALTERATIONS: All alterations, replacements and improvements made
upon the Property during the Lease, including lighting, electrical wiring,
office partitions, all heating and air conditioning, shall be done only with the
prior express written consent of Lessor and shall become the sole and exclusive
property of lessor upon the expiration of this Lease. However, all movable
trade fixtures, machinery and equipment installed by Lessee shall remain the
property of Lessee and be removed by Lessee, at its expense, at the expiration
of the Lease, provided the Lease is not then in default. The Property shall be
returned to Lessor by Lessee in the condition it existed as of the Effective
Date, reasonable and ordinary wear and tear excepted. In the event Lessee
fails to timely remove fixtures, machinery or equipment installed by it, as
required under this Section 8, Lessor may at its option and at Lessee's expense
demolish, remove and dispose of all such items or may retain it as the property
of Lessor without reimbursement to Lessee. Lessee undertakes that no lien,
privilege, or claim of any kind shall rest against the Property from any
repairs, alterations, additions or improvements, or from the construction of any
building or buildings; and agrees to furnish, at its own cost, to Lessor, upon
Lessor's request therefor, the bond of a responsible surety company, qualified
to do business in the State of Louisiana, and reasonably acceptable to Lessor,
conditioned to hold Lessor and the Property harmless against any such lien,
privilege, or claim, said bond to be for an amount equal to the estimated cost
of such construction, restoration, alterations, additions or improvements. No
consent of Lessor for Lessee to make improvements or repairs to the Property
premises shall be deemed to permit Lessor's interest to become subject to labor
or material liens.
9) DELIVERY AT EXPIRATION OF LEASE: At expiration of this Lease, Lessee
shall redeliver to Lessor the premises in good order and condition clear of all
goods and broom cleaned and shall make good all damages to the premises, usual
wear and tear damage by the elements excepted, and shall remain liable for
holdover rent until the Property with keys shall be returned in such order to
Lessor. No demand or notice of such delivery shall be necessary, Lessee
expressly waiving all notices and legal delays.
10) LIEN FOR PAYMENT OF RENTAL: Lessor shall have the rights provided for
protection of interests under Louisiana law, and in addition shall have a
possessory lien on all goods located upon the premises for payment of all rental
and other sums due by Lessee to Lessor by reason of this lease.
11) ASSIGNMENT AND SUBLETTING: This Lease may not be assigned, and the
Property may not be sublet by Lessee, partially or fully, without prior written
consent of Lessor which consent may be withheld in its sole discretion. In the
event of permitted assignment or subletting, Lessee acknowledges that it shall
remain fully responsible for compliance with all terms of the Lease. Any
persons or entity occupying any part of the Property shall, by the act of
subletting formally or informally, be deemed to have assumed all obligations of
Lessee, whether or not Lessor knew of, or approved of, or disapproved of such
subletting. Lessor may assign all or any portion of
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this Lease without the consent of Lessee.
12) INSOLVENCY, ETC. AS DEFAULT: In the event of Lessee's bankruptcy,
receivership, insolvency, attachment by law of its contents, or assignment for
the benefit of creditors, or Lessee's failure to maintain a going business on
the Property, Lessor may upon written notice to Lessee, declare a default in,
and immediately terminate, this Lease.
13) DEFAULT BY LESSEE: Should Lessee fail to pay Base Monthly
Installments, Override Percentage Rent, CAM Charge or any other amounts due
hereunder on the day when such amounts shall become due and payable, and shall
continue in default for a period of ten (10) days after written notice thereof
by Lessor, or should Lessee fail to comply with other obligations of this Lease,
within thirty (30) days from the mailing by Lessor of notice demanding same,
Lessor shall have the right, at Lessor's option to accelerate all rentals due
for the unexpired remaining term of this Lease and declare same immediately due
and payable; and/or to sue for the rents in intervals or as the same accrues.
The foregoing provisions are without prejudice to any remedy which might
otherwise be available under Louisiana law for arrears of rent or breaches of
contract, or to any lien to which Lessor may be entitled.
If Lessee has taken steps to cure any default not curable in twenty (20) days,
such additional reasonable time as is necessary in Lessor's sole discretion to
cure such default shall be granted to Lessee.
Should Lessor terminate this lease as provided in this article, Lessor may re-
enter said Leased premises and remove all persons and personal property without
legal process, and all claims for damages by reason of such re-entry are hereby
expressly waived by Lessee.
Lessor's failure to strictly and promptly enforce these conditions shall not
operate as a waiver of Lessor's rights, Lessor hereby expressly reserving the
right to always enforce prompt payment of rent, or to cancel this Lease
regardless of any indulgences or extensions previously granted.
In the event Lessee defaults in the performance of any of the terms, covenants,
agreements or conditions contained in this Lease and Lessor places the
enforcement of this Lease, or any part thereof, or the collection of any amounts
due or to become due hereunder, or recovery of the possession of the Property in
the hands of an attorney, or files suit upon same, Lessee agrees to pay Lessor's
reasonable attorney's fees, and the other costs and expenses of Lessor incurred
to enforce this Lease.
14) RIGHT TO SHOW SIGN: Lessor reserves the right to post on the premises
signs "For Sale", "For Lease" or "For Rent" during the 120 days preceding the
expiration of this Lease. Sub-Lessee must allow parties who have been previously
authorized by Lessor to visit the Property in view of buying during 120 days
prior to expiration, from 9 A.M. to 5 P.M.
15) RIGHT OF ENTRY: Lessor may enter the premises at reasonable times to
inspect
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the same, to make repairs and alterations, or to run pipe or electric wire, as
Lessor may deem necessary and appropriate provided Lessor shall not
inconvenience Lessee's business.
16) SIGNS: Unless otherwise agreed herein, Lessee shall not place signs
on the Property without Lessor's prior written approval and such approval shall
not be unreasonably withheld. Upon termination of this Lease, Lessee shall
remove signs, advertisements or notices painted on or affixed to the Property
and restore the place it occupied to as similar a condition as reasonably
practical in which it existed as of the Effective Date of this Lease. Upon
Lessee's failure to do so, Lessor may do so at Lessee's expense.
17) CONDITION AND UPKEEP OF PREMISES: Lessee will at Lessee's sole
expense operate in accordance with standards specified by TEXACO , Inc. and
Lessor and keep and maintain in good repair the entire Property and any
additions constructed thereon, including without limitation the loading and
parking areas exclusively used by Lessee, as well as interior walls, floors,
ceiling, ducts, utilities, air conditioning, heating, lighting and plumbing.
In addition to the amounts provided above, Lessee shall pay each month, included
in the CAM Charge a pro-rata share of Lessor's expenses for general maintenance
of general and truck parking lots, grounds and landscape areas of the Property
(including the video poker casino premises), as provided for below under Section
31. Cost elements include exterior maintenance costs, exterior utility costs,
outside security services, insurance premiums and real estate taxes and
assessments. Lessor shall be responsible to maintain the roof, foundations, and
outside walls (not including doors and floors), and Lessee shall be responsible
for all other areas of the Property. Where contractors' or manufacturers'
warranties are applicable and Lessee advises Lessor in writing of the need for
such repair, Lessor, at its option, will enforce such warranties for Lessee's
benefit or assign such warranties to Lessee for Lessee to enforce. However,
Lessor shall not be obliged to make any repair unless it shall be notified in
writing by Lessee of the need of such repair and shall have had a reasonable
period of time to make such repair, and shall not be liable to make any repair
occasioned by Lessee's acts within the premises. Lessor shall not be liable for
any damage or loss in consequence of defects in the Property causing leaks,
stoppage of water, sewer or drains of any other defects about the building and
premises, unless it shall have failed to repair defects for which it is
responsible within a reasonable time following written demand of Lessee. Lessor
shall not be liable for any loss or damage to persons or property caused
directly or indirectly by loss of electrical power. However, Lessor will use
reasonable efforts to timely restore electrical power.
It is also specifically acknowledged that safety and replacement of the plate
glass is Lessee's responsibility, as well as keeping pipes from freezing in the
winter.
Lessee shall immediately repair any damages caused by Lessee that threaten or
weaken the structure or detract from the appearance of the Property. Lessee
shall maintain neatness and cleanliness. If Lessee does not correct the damages
and/or clean the Property within twenty (20) days of written notification by
Lessor, Lessor may proceed with repairs and/or clean-up at Lessee's expense.
Lessee agrees not to store merchandise or leave trash outside the Property.
Trash shall be kept in
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containers. Should Lessee be in default in the requirements of this provision,
Lessor may, after written notice to Lessee, remedy such default at Lessee's
expense, and such expense shall be treated as additional rental due under this
Lease by Lessee.
18) FIRE AND CASUALTY CLAUSE: In case the Property shall be so damaged by
fire or other cause as to be rendered untenable and necessary repairs cannot be
made within 180 days, this Lease may, at the option of Lessor, terminate as of
the time the premises were rendered untenable. However, if the damage is such
that repairs can be completed within 180 days and Lessor shall have received
insurance proceeds in an amount equal to the cost of such repairs, Lessor shall
make such repairs promptly, and allow Lessee an abatement in rent for such time
as the Property remains untenable. If the loss occurs in the last 18 months of
the original term or extension thereof, either party may terminate this Lease
effective the date of the casualty by giving the other party written notice of
such election within 30 days of the loss. In the event of partial loss, the
rent shall be abated by the proportion of the Property rendered unfit for use.
19) INSURANCE AND INDEMNITY:
A. Liability and Property Damage: Lessee shall at all times during the full
term of this Lease and during the full term of any holdovers or other rental
agreements carry and maintain at its own cost and expense, General Public
Liability Insurance against claims for personal injury or death and property
damage occurring on the leased premises, such insurance to afford protection to
both Lessor and Lessee, including coverage for the contractual liability of
Lessee to Lessor assumed hereunder, and is to be maintained in reasonable
amounts, having regard to the circumstances, and the usual practice at the time
of prudent owners and lessees of comparable facilities in the local area, but in
no event in amounts less than Two Million Dollars ($2,000,000) with respect to
bodily injury or death to any person, Two Million Dollars ($2,000,000) with
respect to any one accident, and for property damage not less than Two Million
Dollars ($2,000,000). Lessor must also be named as an "additional insured" on
each policy. Lessee shall deliver to Lessor evidence of such insurance and all
renewals thereof.
B. Fire and Extended Coverage: Lessor shall, at all times during the term
of this Lease, keep all improvements (other than those removable installations,
which by the terms of this Lease Lessee would be permitted to remove at
expiration of this Lease) in and on the demised premises insured to the full
replacement value thereof against loss by fire and extended coverage (including
loss of rent insurance) and maintain such insurance at all times as specified
herein.
Lessee shall pay each month, included in the CAM Charge, a pro-rata share of
Lessor's insurance premium attributable to the full insurance value of the
improvements covered by this Lease. Lessee shall be responsible for maintaining
its own insurance on its property and hereby agrees that Lessor shall have no
liability for any damage to Lessee's property, unless such damage was a result
of the gross negligence or willful misconduct of Lessor.
C. Placement of Insurance: All of the aforementioned policies of insurance
shall be written and
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maintained in responsible "A Rated"insurance companies duly authorized and
licensed to do business in and to issue policies in the State of Louisiana. The
policies providing for the protection required in subparagraph A hereof may
remain in the possession of Lessee, provided, however, that Lessee furnish
satisfactory evidence to Lessor or the Lessor's mortgagee that such policy or
policies fulfill the requirements of subparagraph A.
D. Voiding Insurance: Lessee will not permit the Property to be used for any
purpose which would render the insurance thereon void.
E. Indemnity: Lessee shall indemnify, save harmless and defend Lessor from
and against liability, penalties, expenses, causes of action, suits, claims or
judgments for death, injury, or damages to persons or property during the term
of this Lease arising out of the use, occupation, management or control of the
Property by Lessee, or any act of its agents, employees, licensees or invitees,
unless such death, damage, injury, claim, loss, demand, penalty or the like is
the result of or attributable to the gross negligence or willful misconduct of
Lessor or its agents or employees. Lessee shall and will, at its own expense,
defend any and all suits, demands, or any of the above mentioned claims arising
out of the use, occupation, management or control of the Property by Lessee,
that may be brought against Lessor, or any of them, or in which Lessor, or any
of them, may be impleaded with others, upon any such above mentioned claim or
claims, and shall and will satisfy, pay and discharge any and all judgments that
may be recovered against Lessor, or any of them, in any such actions in which
Lessor, or any of them, may be a party defendant. Lessee's payment of defense
costs shall include payment of attorney fees, consultants' fees, court costs,
administrative costs and expenses.
20) UTILITIES: All utilities on the Leased premises must be separately
metered, and such shall be paid by Lessee, including the cost of heat, water,
electric current, gas, garbage pickup, sewer and special fees arising out of the
use, occupation, management or control of the Property by Lessee. In addition,
Lessee shall pay each month, included in the CAM Charge, a pro-rata share of
Lessor's utility costs for maintaining the general and truck parking lots,
grounds and landscape areas.
21) ATTORNEY'S FEES AND EXPENSES: Except as elsewhere provided, in the
event it becomes necessary for either party to employ an attorney to enforce
collection of the rents, or to enforce compliance with any of the covenants and
agreements herein contained, the unsuccessful litigant shall be liable for
reasonable attorney's fees, costs and expenses incurred by the prevailing party.
22) NOTICE: Any notice provided for herein must be in writing and will
be deemed given when deposited by certified mail (regardless of when or if
received by the addressee), or when actually delivered in person to the parties
or the designated agents at the following addresses or at such other addresses
as they may from time to time direct.
Establishment Licensee: RIVER PORT TRUCK STOP, L.L.C.
----------------------
940 South Lobdell/LA Highway 415 at I-10
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Port Allen, LA 70767
with a copies to: Mr. Don I. Williams
River Port Truck Stop, Inc.
903 East Main Street
New Roads, LA
and
North American Gaming & Entertainment Corporation
c/o Ted C. Parker, Jr.
13150 Coit Road
Dallas, Texas, 75240
Operator: RVC Operations, L.L.C.
--------
c/o Ronald Schexnaildre
940 South Lobdell/LA Highway 415 at I-10
Port Allen, LA 70767
with a copy to: Ronald Schexnaildre
24415 Sabastian Street
Plaquemine, LA 70764
23) CONDEMNATION: If the Property is subjected to condemnation
proceedings, the Lease shall terminate if all of the Property is taken or if the
portion taken is, in Lessor's sole discretion, so extensive that the residue is
inadequate for Lessee's purposes. If the taking be partial, Lessee's rentals
shall be reduced in the proportion to that which the space taken bears to the
space originally leased. The reduction in rentals shall begin from the time of
the filing of the condemnation proceedings in a court of competent jurisdiction,
and not from the time of judgment. Whether condemnation proceedings are filed in
court or negotiated, Lessee may claim for itself compensation for moving
expenses and for the taking of any removable installations which by the terms of
the Lease, Lessee would be permitted to remove at the expiration of this Lease.
All other compensation and awards shall be the sole property of Lessor.
24) QUIET POSSESSION: Lessor agrees to warrant and defend Lessee in its
quiet and peaceful possession of the premises so long as the Lease is not in
default.
25) LEASE HOLDOVER: Should Lessee remain on the premises after expiration
of this Lease, such action shall creating a month-to-month lease with adjusted
Base Monthly Installments six percent (6%) higher than that payable for the last
month of the lease term, with the terms governing override percentages remaining
the same.
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26) ENTIRETY OF UNDERSTANDING IN WRITTEN LEASE: It is agreed that the
entire understanding between the parties is set out in the Lease and any
addendums annexed, and that this supersedes and voids all prior proposals,
letters and agreements, oral or written. The law of Louisiana where the
Property is situated, shall apply.
27) WAIVER: Failure of Lessor to declare immediately upon occurrence
thereof or delay in taking any action in connection therewith shall not waive
such default, but Lessor shall have the right to declare any such default at any
time; no waiver of any default shall alter Lessee's obligations under the lease
with respect to any other existing or subsequent default.
28) BINDING ON HEIRS, ETC.: All covenants and agreements enumerated
herein shall be binding upon and inure to the benefit of both parties hereto and
their respective legal representatives, heirs, successors and assigns throughout
the life of this instrument.
29) SUBROGATION: Neither Lessor nor Lessee shall be liable to the other
for the loss arising out of damage to or destruction of the Property, or the
building or improvements of which the leased premises are a part thereof, when
such loss is caused by any of the perils which are or could be included within
or are insured against by a standard form of fire insurance with extended
coverage, including sprinkler leakage insurance, if any. All such claims for
any and all loss, however caused, are hereby waived. Said absence of liability
shall exist whether or not the damage or destruction is caused by the negligence
of either Lessor or Lessee or by their respective agents, servants or employees.
It is the intention and agreement of the parties that the rentals reserved by
this Lease have been fixed in contemplation that each party shall fully provide
its own insurance protection at its own expense (except as expressly provided
herein), and that each party shall look to its respective insurance carriers for
reimbursement of any such loss, and further, that the insurance carriers
involved shall not be entitled to subrogation under any circumstances against
any party to this Lease. Neither Lessor nor Lessee shall have any interest or
claim in the other's insurance policy or policies, or the proceeds thereof,
unless specifically covered therein as a joint assured or additional named
insured.
30) SUBORDINATE TO MORTGAGE: At the option of Lessor's mortgagee, Lessee
agrees to subordinate this Lease to any mortgage, deed of trust or incumbrance
which the Lessor may have placed, or may hereafter place, on the Property.
Lessee agrees to execute, on demand, any instrument which may be deemed
necessary or desirable to render such mortgage, deed of trust or encumbrance,
whenever made, superior and prior to this Lease.
31) COMMON AREA MAINTENANCE: Lessee agrees to pay a CAM Charge to the
Lessee in addition to the rental provided for above. Such CAM Charge shall be
in the amounts set forth below and shall include an allocated portion of
exterior maintenance costs, exterior utility costs, outside security services,
insurance premiums and real estate taxes and assessments. Lessee shall use its
best effort to maintain the common areas used in connection with the Property in
a safe and clean condition. Lessor shall be responsible to maintain the roof,
foundations, and outside walls (not including doors and floors). Common areas
include, but are not be limited to, general and truck
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parking areas, access roads and facilities in or at the premises including
driveways, loading areas, sidewalks, ramps, landscaped and planting areas,
lighting facilities, signs and other areas and improvements for the general use,
in common, or by Lessee, its officers, agents, employees and customers.
Lessee shall pay each month a pro-rata share, established at 25%, of Lessor's
exterior maintenance costs on the general and truck parking lots and grounds,
including paving, electrical fixtures and wiring, plumbing fixtures and lines,
and landscape plant material and irrigation.
Lessee shall pay each month a pro-rata share, established at 25%, of Lessor's
exterior utility costs on the general and truck parking lots and grounds,
including paving, electrical fixtures and wiring, plumbing fixtures and lines,
and landscape plant material and irrigation.
Lessee shall pay each month a pro-rata share, established at 25%, of Lessor's
outside security services on the general and truck parking lots and grounds,
access roads, facilities in or at the premises, including driveways, loading
areas, sidewalks and ramps.
Lessee shall pay each month an allocated portion of Lessor's insurance premiums
attributable to the full insurance value of the improvements covered by this
Lease. This allocated portion will be defined by the ratio of specific Property
improvements to the total insurance premium for the Property and Video Poker
Complex.
Lessee shall pay each month an allocated portion of the real estate taxes and
assessments, general and special, levied or imposed, with respect to said land
and buildings, including any additions to the Property, which for the purposes
hereof shall be deemed to include related parking facilities and all the
improvements covered by this Lease. This allocated portion will be defined by
the ratio of specific Property improvements to the total insurance premium for
the Property and Video Poker Complex.
Lessee shall pay each month, an estimated one-twelfth (1/12) of said CAM Charge
as estimated by Lessor.
In January of each year, Lessor shall furnish Lessee with a statement setting
forth the amount of the actual expenses incurred in the prior year and the
formula for determining the allocated CAM Charge for the current year. Such
signed statement shall include a copy of the common area maintenance expenses
for the past year and a check or bill for any over or under payment for said
common maintenance charges.
Lessor shall have the right from time to time to establish, modify and enforce
reasonable rules and regulations with respect to all such facilities and areas;
to enhance security and safety, to change traffic access, provided the Property
is adequately served by the new access; to restrict parking by Lessee, its
officers, agents and employees to designated areas; and to do and perform such
other acts as Lessor shall, in the use of its business judgment, determine to be
advisable with a view to the
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improvement of the convenience and use thereof by Lessee, its officers, agents,
employees and customers.
32) LEASE RECORDATION: All parties agree not to record this Lease, but a
memorandum of the Lease may be recorded.
33) PERSONAL GUARANTEES: Ronald Schexnaildre (50%), Van Seneca (45%) and
Chad Schexnaildre (5%), who collectively own 100% of the equity interests of
Lessee (individually and collectively referred to herein as "Guarantor") hereby
execute this Lease for the Purpose of signifying their guarantee of Lessee's
obligations hereunder to the extent set forth in this Section 33. Each Guarantor
hereby jointly and severally and irrevocably and unconditionally guarantees to
Lessor and Lessor's successors and assigns the due and punctual payment of all
Base Monthly Installments at any time due hereunder, by acceleration or
otherwise (the "Guaranteed Amount"). Each Guarantor hereby also jointly and
severally and irrevocably and unconditionally covenants and agrees that he is
jointly and severally liable for the Guaranteed Amount as a primary obligor.
Consequently, each Guarantor agrees that it shall not be necessary for Lessor
(and each Guarantor hereby jointly and severally waives any right which such
Guarantor may have to require Lessor), in order to enforce such payment by such
Guarantor, first to (I) institute suit or exhaust its remedies against Lessee or
others liable for the Guaranteed Amount, (ii) enforce Lessor's rights against
any other guarantors of the Guaranteed Amount, (iii) join Lessee or any others
liable for the Guaranteed Amount in any action seeking to enforce the guarantee
of such Guarantor, or (iv) resort to any other means of obtaining payment of the
Guaranteed Amount.
34. GROSS DEFAULT: If Lessee defaults under that certain Fuel Service and
Truck Stop Operating Agreement between Lessee and Lessor of even date herewith,
Lessor may declare a default under this Lease and terminate this Lease or
exercise such other rights as it may have hereunder or under applicable law for
such default. In the event Lessor defaults under this agreement, Lessee may
pursue all rights and remedies afforded under this agreement, and under the Fuel
Service and Truck Stop Operating Agreement referred to above, and under any
applicable laws or regulations.
35. RIGHT OF FIRST REFUSAL TO PURCHASE THE PREMISES: Notwithstanding any
provision of this Lease or that certain Fuel Service and Truck Stop Operating
Agreement between Lessee and Lessor of even date herewith to the contrary,
Lessor irrevocably assigns to Lessee any and all of Lessor's rights of first
refusal to purchase the premises in accordance with Article XVI, Sections 16.1,
16.2 and 16.3 of that certain Lease Agreement between S.W. Day and T. Joe
Callaway; and River Port Tuck Stop, Inc., dated January 17, 1997 and that
certain Assignment and Assumption of Lease from River Port Truck Stop, Inc. to
River Port Truck Stop, L.L.C. dated May 19, 1998 (collectively referred to as
the "Base Lease"). It is the parties' intention that this right of first
refusal to Lessee shall survive the terms and conditions of this Lease and that
certain Fuel Service and Truck Stop Operating Agreement.
This Lease is made and signed in multiple originals, with the
Effective Date as
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defined above.
IN WITNESS WHEREOF, Lessor hereby signs at _______________________________,
Louisiana on this _______ day of ____________, 199_, after reading of the whole.
WITNESSES: LESSOR:
RIVER PORT TRUCK STOP, L.L.C.
By:
- --------------------------- -----------------------------
DON I. WILLIAMS
Its: Authorized Signing Member
- --------------------------- -------------------------
IN WITNESS WHEREOF, Lessee hereby signs at ____________________________, in
the State of _____________________ on this _____ day of _________________, 199_,
after due reading of the whole.
WITNESSES: LESSEE:
RVC Operations, L.L.C.
By:
- --------------------------- -----------------------------
RONALD SCHEXNAILDRE
Its: Manager
- --------------------------- -------
CERTIFICATION
-------------
The undersigned hereby certify that they are the duly elected and qualified
manager of RVC Operations, L.L.C. and the duly authorized signing member of
RIVER PORT TRUCK STOP, L.L.C., the entities executing this document, and as such
have custody of the company minutes of
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<PAGE>
the meeting of the members of the limited liability company, as applicable, duly
called and constituted, a quorum being present, authorizing, directing and
approving the above named manager and member to execute and deliver this
agreement binding such entities to the obligations herein undertaken.
RVC Operations, L.L.C. (Lessee)
--------------------------------------
Manager
RIVER PORT TRUCK STOP, L.L.C. (Lessor)
--------------------------------------
16
<PAGE>
EXHIBIT 10.42
FUEL SERVICE AND TRUCK STOP OPERATING AGREEMENT
1) PARTIES: This Fuel Service and Truck Stop Operating Agreement (the
"Operating Agreement"), dated effective the first day of ____________________
199 __ is entered into by and between RVC Operations, L.L.C. (hereinafter
"Operator") and RIVER PORT TRUCK STOP, L.L.C. (hereinafter "Establishment
Licensee"), both entities represented by their duly authorized managers and/or
officers pursuant to resolutions, which are attached hereto and made a part
hereof, in consideration of their mutual covenants and Establishment Licensee
hereby contracts with Operator and Operator contracts with Establishment
Licensee, on the terms and conditions herein, to operate a truck stop at the
following described premises (hereinafter the "Truck Stop"):
Two (2) tracts of land containing 5.65 and 2.23 acres respectively, situated in
West Baton Rouge Parish, Louisiana in Section 93, Township 7 South, Range 12
East, as shown on a plan of survey prepared by Edward E. Evans & Associates,
Inc., and dated January 5, 1973, revised February 28, and April 5, 1973, a copy
of which is provided in Attached "A" to this Operating Agreement.
2) KIND OF BUSINESS: Establishment Licensee requires Operator to
operate, and Operator hereby agrees to operate, the Truck Stop throughout the
full term of the Operating Agreement, and the principal business to be conducted
includes truck stop fuel sales, maintenance of truck parking and trucker's
lounge facilities as required by State Gaming Regulations to enable
Establishment Licensee to operate a Video Poker Casino with the maximum number
of video poker gaming devices permitted by applicable law (which is currently 50
devices) and/or such other gaming devices as may subsequently allowed by law. In
addition to the hold harmless and indemnity in Article 21(E), Operator agrees to
comply with, hold harmless, indemnify and defend Establishment Licensee from any
violations of all laws, regulations, or ordinances relative to Operator's use of
the premises. Establishment Licensee requires Operator to fully comply with all
laws and regulations applicable to Operator's business under this Agreement,
including, but not limited to, Video Draw Poker Devices Statute (La. R.S.
33:4862.6 (A) (4) (a)) pertaining to the requirements of a "QUALIFIED TRUCK STOP
FACILITY" ( Attachment "B"). Establishment Licensee requires Operator to
maintain, and Operator hereby agrees to maintain, qualified retailer status for
the sale of TEXACO products, or any other mutually agreeable gasoline and diesel
fuel products to be sold at the Truck Stop during the full term of this
Operating Agreement.
3) RESOLUTORY CONDITION: The validity of this contract shall be subject
to a resolutory condition which condition shall be the disapproval of this
contract by any of the regulatory agencies which require said approval,
including, but not limited to, the Louisiana Gaming Control Board and the Video
Gaming Division of the Louisiana State Police. Furthermore, in the event that
any such regulatory agency should disapprove of any of the terms and/or
conditions of this contract, or in the event that any of the terms and/or
conditions of this contract would otherwise adversely affect the licensure of
either party hereto by any such regulatory agency, including, but not limited
to, the Louisiana Gaming Control Board and the Video Gaming Division of the
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<PAGE>
Louisiana State Police, then in either of said events, any such term of
condition hereof shall be null and void retroactive to the date of the signing
of this contract and shall have no binding effect on the parties hereto.
4) ULTIMATE AUTHORITY: Although Operator shall be responsible for and is
authorized to conduct the day-to-day sale of fuel at the Truck Stop,
Establishment Licensee does hereby reserve and shall have ultimate authority and
control over the operations and fuel pricing at the Truck Stop, as would be
required to satisfy any and all regulatory obligations for the continued
operation of the Truck Stop and the video gaming devices located in the gaming
area, including the right to terminate this contract upon the disapproval of the
Louisiana Gaming Control Board of this contract or upon the disapproval of this
contract by any other regulatory agency which requires said approval. This
Agreement shall not be considered or interpreted as a lease between the parties,
nor shall it be construed that Operator has any control whatsoever of the fuel
facilities of the Truck Stop.
5) TERM: The initial term of this Operating Agreement is for FIFTEEN
(15) YEARS, effective ________________________ (the "Effective Date") and
terminating on ___________________. Notwithstanding the Effective Date, this
Operating Agreement shall not become effective until Operator receives any and
all federal, state, parish or city licenses and permits necessary to operate a
"QUALIFIED TRUCK STOP FACILITY" which must include a "CLASS A-GENERAL RETAIL
PERMIT" and a "CLASS A- RESTAURANT PERMIT", as defined in Part II of Chapter 2
of Title 26 of the Louisiana Revised Statutes of 1950. An "Option to Renew"
this Operating Agreement is also provided herein for an additional FIFTEEN (15)
YEARS based on the same terms and conditions provided for during the initial
term.
6) CONSIDERATION: Operator shall purchase from D & S Distributors, Inc. or
any other mutually agreeable fuel distributor all gasoline and diesel fuel to be
sold at the Truck Stop. Operator agrees to pay Establishment Licensee, without
deduction, off-set, prior notice, or demand, on the tenth day of each month
during the term of this Agreement a ROYALTY (herein so called) on all proceeds
derived from the sale of gasoline and diesel fuel during the preceding month
based on a sale production schedule. The following Royalty Percentages (herein
so called) are hereby established and agreed upon for the following categories:
(A) a Royalty based on gallons of diesel sold and (B) a Royalty based on gallons
of gasoline sold, as follows:
(A) ROYALTY BASED ON GALLONS OF DIESEL SOLD
-------------------------------------------
<TABLE>
<CAPTION>
INCREMENTAL CUMM. % EST. $ EST. CUMM.
GALLONS SOLD GAL. SOLD ROYALTY ROYALTY $ ROYALTY
- ------------ ---------- -------- ------- ------------
<S> <C> <C> <C> <C>
Up To 1,500,000 1,500,000 1.00% $15,000 $15,000
Next 300,000 1,800,000 1.25% 3,750 18,750
Next 300,000 2,100,000 1.50% 4,500 23,250
Next 300,000 2,400,000 1.75% 5,250 28,500
Next 300,000 2,700,000 2.00% 6,000 34,500
Next 300,000 3,000,000 2.50% 7,500 42,000
</TABLE>
2
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Next 300,000 3,300,000 2.75% 8,250 50,250
Next 300,000 3,600,000 3.00% 9,000 59,250
Max 300,000 3,900,000 3.00% 9,000 68,250
</TABLE>
(B) ROYALTY BASED ON GALLONS OF GASOLINE SOLD
---------------------------------------------
<TABLE>
<CAPTION>
INCREMENTAL CUMM. % EST. $ EST. CUMM.
GALLONS SOLD GAL. SOLD ROYALTY ROYALTY $ ROYALTY
- ------------ --------- -------- ------- ------------
<S> <C> <C> <C> <C>
Up To 750,000 750,000 2.00% $15,000 $15,000
Next 150,000 900,000 2.25% 3,375 18,375
Next 150,000 1,050,000 2.50% 3,750 22,125
Next 150,000 1,200,000 2.75% 4,125 26,250
Next 150,000 1,350,000 3.00% 4,500 30,750
Next 150,000 1,500,000 3.50% 5,250 36,000
Next 150,000 1,650,000 3.75% 5,625 41,625
Next 150,000 1,800,000 4.00% 6,000 47,625
Max. 150,000 1,950,000 4.00% 6,000 53,625
</TABLE>
All Royalties derived from Royalty Percentages will be subject to audit by the
Establishment Licensee or its agents, who shall have the right, on demand, to
review Operator's state sales tax returns, all cash register data, including
computer files, tapes and receipts, all bank deposits and all records pertaining
to verification of pricing of fuel available for sale relative to the cost of
goods sold, to ensure the accurate recording of all sales for cash, credit card
and accounts receivable transactions.
All amounts due Establishment Licensee hereunder are payable to the order of
RIVER PORT TRUCK STOP, L.L.C. and shall be delivered to Establishment Licensee
or its agent at 13150 COIT ROAD, DALLAS, TEXAS, 75240, or as Establishment
Licensee or its successors or assigns may hereafter from time to time designate
in writing pursuant to the Notice clause set forth herein.
7) SECURITY DEPOSIT: On the Effective Date, there shall be due and
payable by Operator a security deposit in an amount of SEVEN THOUSAND-FIVE
HUNDRED DOLLARS ($7,500) to be held for the performance by Operator of
Operator's covenants and obligations under this Operating Agreement. It is
understood that the deposit shall not be considered an advance payment of
consideration or a measure of Establishment Licensee's damage in case of default
by Operator or breach by Operator of Operator's covenants under this Operating
Agreement. Establishment Licensee may, from time to time, without prejudice to
any other remedy, use the security deposit to the extent necessary to make good
any event of default or breach of covenant of Operator, and any remaining
balance of the security deposit shall be returned by Establishment Licensee to
Operator upon termination of this Operating Agreement.
8) DELIVERY OF PREMISES: Operator hereby agrees to accept the Truck Stop
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<PAGE>
in its existing condition, except for liability for environmental contamination
pre-existing the Effective Date hereof and except for remedial costs to clean-up
any pre-existing environmental contamination. With the environmental exception
above, Lessee assumes responsibility for the condition of the Truck Stop
premises thereafter the Effective Date. Any additional improvements or
alterations desired by Operator thereafter shall be at the Operator's cost, with
Establishment Licensee's prior written approval, except as hereinafter provided.
9) TAXES: In addition to the Royalty provided for above, Operator shall
pay each month, a ROYALTY SUR-CHARGE (herein so called) which represents an
allocated portion of the real estate taxes and assessments, general and special,
levied or imposed, with respect to said Truck Stop, including any additions to
the Truck Stop, which for the purposes hereof shall be deemed to include related
parking facilities and all the improvements to said building, as estimated by
Establishment Licensee. In the month of December of each year, Establishment
Licensee shall furnish Operator with a statement providing the amount of taxes
levied against the land, building and improvements, and Operator's share of said
tax, and the amount of the tax paid by Operator during the prior year.
Establishment Licensee's statement shall include a copy of the tax bills for the
year and a check or bill for any over or under payment for said taxes.
In addition to all other payments required to be paid by Operator to
Establishment Licensee, Operator shall pay in the same manner as set forth in
the preceding paragraph all consideration, sales and use taxes, if any, levied
or imposed with respect to the Operating Agreement premises or this Operating
Agreement and all other taxes, charges, assessments and governmental
impositions, extraordinary or otherwise, of every nature and kind, which may,
during the Operating Agreement term, be assessed, levied, or imposed, upon this
Operating Agreement or the Operating Agreement premises, or any part thereof, or
any improvements thereon.
10) ALTERATIONS: All alterations, replacements and improvements made upon
the Truck Stop during the Operating Agreement, including lighting, electrical
wiring, office partitions, all heating and air conditioning, shall be done only
with the prior express written consent of Establishment Licensee and shall
become the sole and exclusive property of Establishment Licensee upon the
expiration of this Operator Agreement. However, all movable trade fixtures,
machinery and equipment installed by Operator shall remain the property of
Operator and be removed by Operator, at its expense, at the expiration of the
Operating Agreement, provided the Operating Agreement is not then in default.
The Truck Stop shall be returned to Establishment Licensee by Operator in the
condition it existed as of the Effective Date, reasonable and ordinary wear and
tear excepted. In the event Operator fails to timely remove fixtures, machinery
or equipment installed by it, as required under this Section 10, Establishment
Licensee may at its option and at Operator's expense demolish, remove and
dispose of all such items or may retain it as the Truck Stop of Establishment
Licensee without reimbursement to Operator. Operator undertakes that no lien,
privilege, or claim of any kind shall rest against the Truck Stop from any
repairs, alterations, additions or improvements, or from the construction of any
building or buildings; and agrees to furnish, at its own cost, to Establishment
Licensee, upon Establishment Licensee's request therefor, the bond of a
responsible surety company, qualified to do business in the State of Louisiana,
and
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<PAGE>
reasonably acceptable to Establishment Licensee, conditioned to hold
Establishment Licensee and the Truck Stop harmless against any such lien,
privilege, or claim, said bond to be for an amount equal to the estimated cost
of such construction, restoration, alterations, additions or improvements. No
consent of Establishment Licensee for Operator to make improvements or repairs
to the Truck Stop premises shall be deemed to permit Establishment Licensee's
interest to become subject to labor or material liens.
11) DELIVERY AT EXPIRATION OF OPERATING AGREEMENT: At expiration of this
Operating Agreement the Truck Stop premises must be in good order and condition
clear of all goods and broom cleaned and Operator shall make good all damages to
the premises, usual wear and tear damage by the elements excepted.
12) LIEN FOR PAYMENT OF CONSIDERATION: Establishment Licensee shall have
the rights provided for protection of interests under Louisiana law, and in
addition shall have a possessory lien on all FUEL INVENTORY located upon the
Truck Stop premises for payment of all sums due by Operator to Establishment
Licensee by reason of this Operating Agreement.
13) ASSIGNMENT: This Operating Agreement may not be assigned, partially
or fully, by Operator without prior written consent of Establishment Licensee
which consent may be withheld in its sole discretion. In the event of permitted
assignment, Operator acknowledges it shall remain fully responsible for
compliance with all terms of the Operating Agreement. Any persons or entity
receiving permitted assignment by Establishment Licensee shall assume all
obligations of Operator under this Operating Agreement. Establishment Licensee
may assign all or any portion of this Operating Agreement without the consent of
Operator.
14) INSOLVENCY, ETC. AS DEFAULT: In the event of Operator's bankruptcy,
receivership, insolvency, attachment by law of its contents, or assignment for
the benefit of creditors, or Operator's failure to maintain a going business at
the Truck Stop, Establishment Licensee may upon written notice to Operator,
declare a default in, and immediately terminate, this Operating Agreement.
15) DEFAULT BY OPERATOR: Should Operator fail to pay Royalty, Royalty
Sur-Charge or any other amounts due hereunder on the day when such amounts shall
become due and payable, and shall continue in default for a period of ten (10)
days after written notice thereof by Establishment Licensee, or should Operator
fail to comply with other obligations of this Operating Agreement, within thirty
(30) days from the mailing by Establishment Licensee of notice demanding same,
Establishment Licensee shall have the right, at Establishment Licensee's option,
to immediately terminate this agreement, and/or sue for the damages, and/or seek
specific performance of this Operating Agreement by Operator. The foregoing
provisions are without prejudice to any remedy which might otherwise be
available under Louisiana or other applicable law for breaches of contract or to
any lien to which Establishment Licensee may be entitled.
If Operator has taken steps to cure any default not curable in twenty (20) days,
such additional
5
<PAGE>
reasonable time as is necessary in Establishment Licensee's sole discretion to
cure such default shall be granted to Operator.
Should Establishment Licensee terminate this Operating Agreement as provided in
this article, Establishment Licensee may remove all persons and personal
property without legal process, and all claims for damages by reason of such
removal are hereby expressly waived by Operator.
Establishment Licensee's failure to strictly and promptly enforce these
conditions shall not operate as a waiver of Establishment Licensee's rights,
Establishment Licensee hereby expressly reserving the right to always enforce
prompt payment of all sums due hereunder, and/or to cancel this Operating
Agreement regardless of any indulgences or extensions previously granted.
In the event Operator defaults in the performance of any of the terms,
covenants, agreements or conditions contained in this Operating Agreement and
Establishment Licensee places the enforcement of this Operating Agreement, or
any part thereof, or the collection of any amounts due or to become due
hereunder, or recovery of the possession of the Truck Stop in the hands of an
attorney, or files suit upon same, Operator agrees to pay Establishment
Licensee's reasonable attorney's fees and the other costs and expenses of
Establishment Licensee incurred to enforce this Operating Agreement.
16) RIGHT TO SHOW SIGN: Establishment Licensee reserves the right to post
on the premises signs "For Sale", "For Lease" or "For Rent" during the 120 days
preceding the expiration of this Operating Agreement. Operator must allow
parties who have been previously authorized by Establishment Licensee to visit
the Truck Stop in view of buying during such 120 days prior to expiration, from
9 A.M. to 5 P.M.
17) RIGHT OF ENTRY: Establishment Licensee at anytime may inspect the
Truck Stop premises and make repairs and alterations, or to run pipe or electric
wire, as Establishment Licensee may deem necessary and appropriate provided
Establishment Licensee shall not inconvenience the Operator's operations of the
Truck Stop.
18) SIGNS: Unless otherwise agreed herein, Operator shall not place signs
on the Truck Stop without Establishment Licensee's prior written approval and
such approval shall not be unreasonably withheld. Upon termination of this
Operating Agreement, Operator shall remove signs, advertisements or notices
painted on or affixed to the Truck Stop and restore the place it occupied to as
similar a condition as reasonably practical in which it existed as of the
Effective Date of this Operating Agreement. Upon Operator's failure to do so,
Establishment Licensee may do so at Operator's expense.
19) CONDITION AND UPKEEP OF PREMISES: Operator will at Operator's sole expense
operate in accordance with standards specified by TEXACO, INC. and Establishment
Licensee and keep and maintain in good repair the entire Truck Stop and any
additions constructed thereon, including without limitation the loading and
parking areas exclusively used by Operator, as well as
6
<PAGE>
interior walls, floors, ceiling, ducts, utilities, air conditioning, heating,
lighting and plumbing. In addition to the consideration provided above, Operator
shall pay each month, included in a ROYALTY SUR-CHARGE, a pro-rata share of
Establishment Licensee's expenses for general maintenance of general and truck
parking lots, grounds and landscape areas of the Truck Stop and Video Poker
casino premises, provided for below under Section 32. Cost elements include
exterior maintenance costs, exterior utility costs, outside security services,
insurance premiums and real estate taxes and assessments. Establishment Licensee
shall be responsible to maintain the roof, foundations, and outside walls (not
including doors and floors), and Operator shall be responsible for all other
areas of the Truck Stop. Where contractors' or manufacturers' warranties are
applicable and Operator advises Establishment Licensee in writing of the need
for such repair, Establishment Licensee, at its option, will enforce such
warranties for Operator's benefit or assign such warranties to Operator for
Operator to enforce. However, Establishment Licensee shall not be obliged to
make any repair unless it shall be notified in writing by Operator of the need
of such repair and shall have had a reasonable period of time to make such
repair, and shall not be liable to make any repair occasioned by Operator's acts
within the Truck Stop premises. Establishment Licensee shall not be liable for
any damage or loss in consequence of defects in the Truck Stop causing leaks,
stoppage of water, sewer or drains or any other defects about the Truck Stop
building and premises, unless it shall have failed to repair defects for which
it is responsible within a reasonable time following written demand of Operator.
Establishment Licensee shall not be liable for any loss or damage to persons or
property caused directly or indirectly by loss of electrical power. However,
Lessor will use reasonable efforts to timely restore electrical power.
It is also specifically acknowledged that safety and replacement of the plate
glass is Operator's responsibility, as well as keeping pipes from freezing in
the winter.
Operator shall immediately repair any damages caused by Operator that threaten
or weaken the structure or detract from the appearance of the Truck Stop.
Operator shall maintain neatness and cleanliness. If Operator does not correct
the damages and/or clean the Truck Stop within twenty (20) days of written
notification by Establishment Licensee, Establishment Licensee may proceed with
repairs and/or clean-up at Operator's expense.
Operator agrees not to store merchandise or leave trash outside the Truck Stop.
Trash shall be kept in containers. Should Operator be in default in the
requirements of this provision, Establishment Licensee may, after written notice
to Operator, remedy such default at Operator's expense, and such expense shall
be treated as additional consideration due under this Operating Agreement by
Operator.
20) FIRE AND CASUALTY CLAUSE: In case the Truck Stop shall be so damaged
by fire or other cause as to be rendered inoperable and necessary repairs cannot
be made within 180 days, this Operating Agreement may, at the option of
Establishment Licensee, terminate as of the time the Truck Stop premises were
rendered inoperable. However, if the damage is such that repairs can be
completed within 180 days and Establishment Licensee shall have received
insurance proceeds in an amount equal to the cost of such repairs and
Establishment Licensee can make such
7
<PAGE>
repairs promptly the Operating Agreement will remain in force. If the loss
occurs in the last 18 months of the original term or extension thereof, either
party may terminate this Operating Agreement effective the date of the casualty
by giving the other party written notice of such election within 30 days of the
loss.
21) INSURANCE AND INDEMNITY:
A. Liability and Property Damage: Operator shall at all times during the full
term of this Operating Agreement and during the full term carry and maintain at
its own cost and expense, General Public Liability Insurance against claims for
personal injury or death and property damage occurring on the Truck Stop
premises, such insurance to afford protection to both Establishment Licensee and
Operator, including coverage for the contractual liability of Operator to
Establishment Licensee assumed hereunder, and is to be maintained in reasonable
amounts, having regard to the circumstances, and the usual practice at the time
of prudent owners and operators of comparable facilities in the local area, but
in no event in amounts less than Two Million Dollars ($2,000,000) with respect
to bodily injury or death to any person, Two Million Dollars ($2,000,000) with
respect to any one accident, and for property damage not less than Two Million
Dollars ($2,000,000). Establishment Licensee must also be named as an
"additional insured" on each policy. Operator shall timely deliver to
Establishment Licensee evidence of such insurance and all renewals thereof.
B. Fire and Extended Coverage: Establishment Licensee shall, at all times
during the term of this Operating Agreement, keep all improvements (other than
those removable installations, which by the terms of this Operating Agreement
Operator would be permitted to remove at expiration of this Operating Agreement)
in and on the Truck Stop premises insured to the full replacement value thereof
against loss by fire and extended coverage and maintain such insurance at all
times as specified herein.
Operator shall pay each month, included in a ROYALTY SUR-CHARGE, a pro-rata
share of Establishment Licensee's insurance premium attributable to the full
insurance value of the improvements covered by this Operating Agreement.
Operator shall be responsible for maintaining its own insurance on its property
and hereby agrees that Establishment Licensee shall have no liability for any
damage to Operator's property, unless such damage was as a result of the gross
negligence or willful misconduct of Establishment Licensee.
C. Placement of Insurance: All of the aforementioned policies of insurance
shall be written and maintained in responsible "A Rated"insurance companies duly
authorized and licensed to do business in and to issue policies in the State of
Louisiana. The policies providing for the protection required in subparagraph A
hereof may remain in the possession of Operator, provided, however, that
Operator furnish satisfactory evidence to Establishment Licensee or the
Establishment Licensee's mortgagee that such policy or policies fulfill the
requirements of subparagraph A.
D. Voiding Insurance: Operator will not permit the Truck Stop to be used for
any purpose which would render the insurance on the Truck Stop premises thereon
void.
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E. Indemnity: Operator shall indemnify, save harmless and defend
Establishment Licensee from and against liability, penalties, expenses, causes
of action, suits, claims or judgments for death, injury, or damages to persons
or Truck Stop during the term of this Operating Agreement arising out of the
operation of the Truck Stop by Operator, or any of its agents, employees,
licensees or invitees, unless such death, damage, injury, claim, loss, demand,
penalty or the like is the result of or attributable to the gross negligence or
willful misconduct of Establishment Licensee or its agents or employees.
Operator shall and will, at its own expense, defend any and all suits, demands,
or any of the above mentioned claims arising out of the contracted operation of
the Truck Stop by Operator, that may be brought against Establishment Licensee,
or any of them, or in which Establishment Licensee, or any of them, may be
impleaded with others, upon any such above mentioned claim or claims, and shall
and will satisfy, pay and discharge any and all judgments that may be recovered
against Establishment Licensee, or any of them, in any such actions in which
Establishment Licensee, or any of them, may be a party defendant. Operator's
payment of defense costs shall include payment of attorney fees, consultants'
fees, court costs, administrative costs and expenses.
22) UTILITIES: All utilities on the Truck Stop premises must be
separately metered, and such shall be paid by Operator, including the cost of
heat, water, electricity, gas, garbage pickup, sewer and special fees arising
out of the use of the Truck Stop by Operator. In addition, Operator shall pay
each month, included in a ROYALTY SUR-CHARGE, a pro-rata share of Establishment
Licensee's utility costs for maintaining the general and truck parking lots,
grounds and landscape areas.
23) ATTORNEY'S FEES AND EXPENSES: Except as elsewhere provided, in the
event it becomes necessary for either party to employ an attorney to enforce
collection of the royalties, or to enforce compliance with any of the covenants
and agreements herein contained, the unsuccessful litigant shall be liable for
reasonable attorney's fees, costs and expenses incurred by the prevailing party.
24) NOTICE: Any notice provided for herein must be in writing and will
be deemed given when deposited by certified mail (regardless of when or if
received by the addressee), or when actually delivered in person to the parties
or the designated agents at the following addresses or at such other addresses
as they may from time to time direct.
Establishment Licensee: RIVER PORT TRUCK STOP, L.L.C.
---------------------- 940 South Lobdell/LA Highway 415 at I-10
Port Allen, LA 70767
with a copies to: Mr. Don I. Williams
River Port Truck Stop, Inc.
903 East Main Street
New Roads, LA
and
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North American Gaming & Entertainment
Corporation
c/o Ted C. Parker, Jr.
13150 Coit Road
Dallas, Texas, 75240
Operator: RVC Operations, L.L.C.
-------- c/o Ronald Schexnaildre
940 South Lobdell/LA Highway 415 at I-10
Port Allen, LA 70767
with a copy to: Ronald Schexnaildre
24415 Sabastian Street
Plaquemine, LA 70764
25) CONDEMNATION: If the Truck Stop is subjected to condemnation
proceedings, the Operating Agreement shall terminate if all of the Truck Stop is
taken or if the portion taken is, in Establishment Licensee's sole discretion,
so extensive that the residue is inadequate for Establishment Licensee's
purposes. Whether condemnation proceedings are filed in court or negotiated,
Operator may claim for itself compensation for moving expenses and for the
taking of any removable installations which by the terms of the Operating
Agreement Operator would be permitted to remove at the expiration of this
Operating Agreement. All other compensation and awards shall be the sole
property of Establishment Licensee.
26) OPERATING AGREEMENT HOLDOVER: Should Operator remain on the premises
after expiration of this Operating Agreement, such action shall only create a
month-to-month Operating Agreement with the terms governing Royalty Percentages
remaining the same.
27) ENTIRETY OF UNDERSTANDING IN WRITTEN OPERATING AGREEMENT: It is
agreed that the entire understanding between the parties is set out in this
Operating Agreement and any addendums annexed, and that this Operating Agreement
supersedes and voids all prior proposals, letters and agreements, oral or
written. The law of Louisiana where the Truck Stop is situated, shall apply.
28) WAIVER: Failure of Establishment Licensee to declare immediately upon
occurrence thereof, or delay in taking any action in connection therewith, shall
not waive any default, but Establishment Licensee shall have the right to
declare any such default at any time; no waiver of any default shall alter
Operator's obligations under this Operating Agreement with respect to any other
existing or subsequent default.
29) BINDING ON HEIRS, ETC.: All covenants and agreements enumerated
herein shall be binding upon and inure to the benefit of both parties hereto and
their respective legal representatives, heirs, successors and assigns throughout
the life of this instrument.
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30) SUBROGATION: Neither Establishment Licensee nor Operator shall be
liable to the other for the loss arising out of damage to or destruction of the
Truck Stop, or the building or improvements of which the Truck Stop premises are
a part thereof, when such loss is caused by any of the perils which are or could
be included within or are insured against by a standard form of fire insurance
with extended coverage, including sprinkler leakage insurance, if any. All such
claims for any and all loss, however caused, are hereby waived. Said absence of
liability shall exist whether or not the damage or destruction is caused by the
negligence of either Establishment Licensee or Operator or by their respective
agents, servants or employees. It is the intention and agreement of the parties
that the considerations reserved by this Operating Agreement have been fixed in
contemplation that each party shall fully provide its own insurance protection
at its own expense (except as expressly provided herein), and that each party
shall look to its respective insurance carriers for reimbursement of any such
loss, and further, that the insurance carriers involved shall not be entitled to
subrogation under any circumstances against any party to this Operating
Agreement. Neither Establishment Licensee nor Operator shall have any interest
or claim in the other's insurance policy or policies, or the proceeds thereof,
unless specifically covered therein as a joint assured or additional named
insured.
31) SUBORDINATE TO MORTGAGE: At the option of Establishment Licensee's
mortgagee, Operator agrees to subordinate this Operating Agreement to any
mortgage, deed of trust or incumbrance which the Establishment Licensee may have
placed, or may hereafter place, on the Truck Stop. Operator agrees to execute,
on demand, any instrument which may be deemed necessary or desirable to render
such mortgage, deed of trust or encumbrance, whenever made, superior and prior
to this Operating Agreement.
32) ROYALTY SUR-CHARGE: Operator agrees to pay a ROYALTY SUR-CHARGE to
the Establishment Licensee in addition to the consideration provided for above.
Such ROYALTY SUR-CHARGE shall be in the amounts set forth below and shall
include an allocated portion of exterior maintenance costs, exterior utility
costs, outside security services, insurance premiums and real estate taxes and
assessments. Establishment Licensee shall use its best effort to maintain the
common areas used in connection with the Truck Stop in a safe and clean
condition. Establishment Licensee shall be responsible to maintain the roof,
foundations, and outside walls (not including doors and floors). Common areas
include, but are not be limited to, general and truck parking areas, access
roads and facilities in or at the Truck Stop premises including driveways,
loading areas, sidewalks, ramps, landscaped and planting areas, lighting
facilities, signs and other areas and improvements for the general use, in
common, or by Operator, its officers, agents, employees and customers.
Operator shall pay each month a pro-rata share, established at 25%, of
Establishment Licensee's exterior maintenance costs on the general and truck
parking lots and grounds, including paving, electrical fixtures and wiring,
plumbing fixtures and lines, and landscape plant material and irrigation.
Operator shall pay each month a pro-rata share, established at 25%, of
Establishment Licensee's
11
<PAGE>
exterior utility costs on the general and truck parking lots and grounds,
including paving, electrical fixtures and wiring, plumbing fixtures and lines,
and landscape plant material and irrigation.
Operator shall pay each month a pro-rata share, established at 25%, of
Establishment Licensee's outside security services on the general and truck
parking lots and grounds, access roads, facilities in or at the premises,
including driveways, loading areas, sidewalks and ramps.
Operator shall pay each month an allocated portion of Establishment Licensee's
insurance premiums attributable to the full insurance value of the Truck Stop
improvements covered by this Operating Agreement. This allocated portion will
be defined by the ratio of specific Truck Stop improvements to the total
insurance premium for the Truck Stop and Video Poker Complex.
Operator shall pay each month an allocated portion of the real estate taxes and
assessments, general and special, levied or imposed, with respect to said land
and buildings, including any additions to the Truck Stop, which for the purposes
hereof shall be deemed to include related parking facilities and all the
improvements covered by this Operating Agreement. This allocated portion will
be defined by the ratio of specific Truck Stop improvements to the total
insurance premium for the Truck Stop and Video Poker Complex.
Operator shall pay each month, an estimated one-twelfth (1/12) of said ROYALTY
SUR-CHARGE as estimated by Establishment Licensee.
In January of each year, Establishment Licensee shall furnish Operator with a
statement setting forth the amount of the actual expenses incurred in the prior
year and the formula for determining the allocated ROYALTY SUR-CHARGE for the
current year. Such signed statement shall include a copy of the common area
maintenance expenses for the past year and a check or bill for any over or under
payment for said common maintenance charges.
Establishment Licensee shall have the right from time to time to establish,
modify and enforce reasonable rules and regulations with respect to all such
facilities and areas; to enhance security and safety, to change traffic access,
provided the Truck Stop is adequately served by the new access; to restrict
parking by Operator, its officers, agents and employees to designated areas; and
to do and perform such other acts as Establishment Licensee shall, in the use of
its business judgment, determine to be advisable with a view to the improvement
of the convenience and use thereof by Operator, its officers, agents, employees
and customers.
33) OPERATING AGREEMENT RECORDATION: All parties agree not to record this
Operating Agreement, but a memorandum of the Operating Agreement may be
recorded.
34) GROSS DEFAULT: If Operator defaults under that certain Convenience
Store and Restaurant Sub-Lease between Operator (Lessee) and Establishment
Licensee (Lessor) of even date herewith, Establishment Licensee may declare a
default under this Operating Agreement and terminate this Operating Agreement or
exercise such other rights as it may have hereunder or under
12
<PAGE>
applicable law for such default. In the event Establishment Licensee defaults
under this Operating Agreement, Lessee may pursue all rights and remedies
afforded under this Operating Agreement, and under the Convenience Store and
Restaurant Sub-Lease referred to above, and under any applicable laws or
regulations.
35) RIGHT OF FIRST REFUSAL TO PURCHASE THE PREMISES: Notwithstanding any
provision of this Fuel Service and Truck Stop Operating Agreement or that
certain Convenience Store and Restaurant Sub-Lease (the "Lease") between
Operator and Establishment Licensee of even date herewith to the contrary,
Establishment Licensee irrevocably assigns to Operator any and all of
Establishment Licensee's rights of first refusal to purchase the premises in
accordance with Article XVI, Sections 16.1, 16.2 and 16.3 of that certain Lease
Agreement between S. W. Day and T. Joe Callaway; and River Port Truck Stop,
Inc., dated January 17, 1997 and that certain Assignment and Assumption of Lease
from River Port Truck Stop, Inc. to River Port Truck Stop, L.L.C., dated May 19,
1998 (collectively referred to as the "Base Lease"). It is the parties'
intention that this right of first refusal to Operator shall survive the terms
and conditions of this Fuel Service and Truck Stop Operating Agreement and the
Lease.
This Operating Agreement is made and signed in multiple originals, with the
Effective Date as defined above.
IN WITNESS WHEREOF, Establishment Licensee hereby signs at _______________
___________________, Louisiana on this ______ day of _________________________,
199___, after due reading of the whole.
WITNESSES: Establishment Licensee:
RIVER PORT TRUCK STOP, L.L.C.
By:
- ------------------------------ ------------------------------
DON I. WILLIAMS
Its: Authorized Signing Member
- ------------------------------
IN WITNESS WHEREOF, Operator hereby signs at ___________________________,
in the State of ______________________ on this _______ day of _______________,
19 ___, after
13
<PAGE>
due reading of the whole.
WITNESSES: Operator:
RVC Operations, L.L.C.
By:
- ------------------------------ ------------------------------
RONALD SCHEXNAILDRE
Its: Manager
- ------------------------------ -------
CERTIFICATION
-------------
The undersigned hereby certify that they are the duly elected and qualified
manager of RVC Operations, L.L.C. and the duly authorized signing member of
RIVER PORT TRUCK STOP, L.L.C., the entities executing this document, and as such
have custody of the company minutes of the meeting of the members of the limited
liability company, as applicable, duly called and constituted, a quorum being
present, authorizing, directing and approving the above named manager and member
to execute and deliver this agreement binding such entities to the obligations
herein undertaken.
RVC Operations, L.L.C. (Lessee)
------------------------------
Manager
RIVER PORT TRUCK STOP, L.L.C. (Lessor)
------------------------------
14
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF
NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
PERCENTAGE STATE OF INCORPORATION
NAME OWNERSHIP OR ORGANIZATION
---- ----------- ---------------
- --------------------------------------------------------------------------------
<S> <C> <C>
Ozdon Investments, Inc. 100% Louisiana
- --------------------------------------------------------------------------------
River Port Truck Stop, Inc. 100% Louisiana
- --------------------------------------------------------------------------------
GalaxSea Cruises and Tours, Inc. 100% Oklahoma
- --------------------------------------------------------------------------------
I.T. Cruise, Inc. 100% Oklahoma
- --------------------------------------------------------------------------------
OM Operating, L.L.C. 24.5% Louisiana
- --------------------------------------------------------------------------------
River Port Truck Stop, LLC 25% Louisiana
- --------------------------------------------------------------------------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1998 AND THE CONSOLIDATED STATEMENTS
OF OPERATIONS AND CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1998, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 281,109
<SECURITIES> 0
<RECEIVABLES> 324,765
<ALLOWANCES> 54,240
<INVENTORY> 123,090
<CURRENT-ASSETS> 791,699
<PP&E> 2,271,479
<DEPRECIATION> 1,326,352
<TOTAL-ASSETS> 5,355,012
<CURRENT-LIABILITIES> 4,252,464
<BONDS> 0
0
0
<COMMON> 417,886
<OTHER-SE> (1,532,302)
<TOTAL-LIABILITY-AND-EQUITY> 5,355,012
<SALES> 25,349,736
<TOTAL-REVENUES> 25,349,736
<CGS> 16,354,213
<TOTAL-COSTS> 7,780,065
<OTHER-EXPENSES> 494,767
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 307,187
<INCOME-PRETAX> (213,771)
<INCOME-TAX> 39,979
<INCOME-CONTINUING> (213,771)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 253,750
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
