<PAGE>
SCHEDULE 14C
Information Statement Pursuant to Section 14(c) of the
Securities Exchange Act of 1934 (Amendment No. __)
Check the appropriate box:
[X] Preliminary Information Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14c-5(d)(2))
[ ] Definitive Information Statement
NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION
---------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.
1. Title of each class of securities to which transaction applies: N/A
2. Aggregate number of securities to which transaction applies: N/A
3. Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined): N/A
4. Proposed maximum aggregate value of transaction: $2,051,535
Cash received: $1,333,334
Value of securities received 718,201
----------
$2,051,535
==========
5. Total fee paid: $411
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1. Amount Previously Paid: N/A
2. Form, Schedule or Registration Statement No.: N/A
3. Filing Party: N/A
4. Dated Filed: N/A
<PAGE>
Preliminary Copy
NORTH AMERICAN GAMING AND
ENTERTAINMENT CORPORATION
13150 Coit Road, Suite 125
Dallas, Texas 75240
INFORMATION STATEMENT
FOR
ACTION BY CONSENT OF STOCKHOLDERS
----------------------------------------
WE ARE NOT ASKING FOR A PROXY
AND YOU ARE NOT REQUESTED TO
SEND US A PROXY.
----------------------------------------
This Information Statement is furnished in connection with the taking of
action by the written consent of a majority of stockholders (the "Written
Consent") of North American Gaming and Entertainment Corporation, a Delaware
corporation (the "Company"), to be effective on or about January 12, 2000.
This Information Statement is not to be regarded as proxy solicitation
material. The approximate date on which this Information Statement is first sent
to stockholders is December 23, 1999.
VOTING RIGHTS
In accordance with Delaware law and the Company's Certificate of
Incorporation and bylaws, whenever stockholders are required or permitted to
take any action, such action may be taken without a meeting by means of a
Written Consent setting forth the action so taken, signed by the holders of a
majority of all outstanding shares entitled to vote thereon.
On each matter entitled to be submitted to a vote or the subject of a
consent of the stockholders, each stockholder is entitled to one vote in person
or proxy for each share owned of record. We are not asking you for a proxy and
you are not requested to send us a proxy or consent.
ACTION TAKEN BY WRITTEN CONSENT
OF A MAJORITY OF STOCKHOLDERS
On October 12, 1999, there were 33,620,920 issued and outstanding shares of
the Company's common stock, $0.1 par value (the "Common Stock"). On such date,
five stockholders of the Company owning 20,902,012 shares of Common Stock,
representing approximately 62.2% of the issued and outstanding shares of Common
Stock, executed the Written Consent approving the sale (the "Sale") by the
Company of substantially all its assets related to its cruise business (the
"Cruise Business") to Travelbyus.com Ltd. and two of its subsidiaries
("Travelbyus"). The Company's Board of Directors approved the Sale on October
11, 1999. The Sale will become effective on January 12, 2000, twenty days after
this Information Statement is first mailed to the stockholders of the Company.
This Information Statement will be mailed to stockholders of record as of
November 26, 1999 (the "Record Date"). Attached to this Information Statement as
Appendix A for your information is a conformed copy of the Written Consent
executed by these five stockholders on October 11, 1999.
<PAGE>
PRINCIPAL STOCKHOLDERS AND SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information regarding the ownership
of Common Stock as of October 12, 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:
<TABLE>
<CAPTION>
Name and Address
of Beneficial Owner Number of Shares Percent
------------------- ---------------- -------
<S> <C> <C>
International Tours, Inc./(1)/ 17,390,294 51.7
13150 Coit Road
Suite 125
Dallas, Texas 75240
I.T. Financial Corporation/(1)/ 17,622,620 52.4
13150 Coit Road
Suite 125
Dallas, Texas 75240
Hawes Partners/(1)/ 17,622,620 52.4
Shangri-La Vista Tower
Route 3
Afton, Oklahoma 74331
E.H. Hawes, II/(1)/ 17,624,954 52.4
Shangri-La Vista Tower
Route 3
Afton, Oklahoma 74331
Ron Blaylock/(1)/ 17,628,454 52.4
13150 Coit Road
Suite 125
Dallas, Texas 75240
Lamar E. Ozley, Jr./(2)/ 2,054,329 6.1
6306 Mill Point Circle
Dallas, Texas 75248
Daryl N. Snadon/(3)/ 535,666 1.6
15280 Addison Rd., Ste 300
Dallas, Texas 75248
Richard P. Crane, Jr./(4)/ 785,556 2.3
530 Wilshire Blvd., Ste. 400
Santa Monica, California 90401
All Executive Officers and 18,946,176 55.5
Directors as a Group
(3 persons)/(1)(3)(4)/
</TABLE>
- -------------------------
(1) International Tours, Inc. ("International") owns 17,390,294 shares of
Common Stock of record and beneficially. I.T. Financial Corporation
("ITFC"), E. H. Hawes, II and Ron Blaylock own of record and
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beneficially 232,326, 2,334 and 5,834 shares of Common Stock, respectively.
Hawes Partners is a partnership owned two-thirds by Mr. Hawes and one-third
by Mr. Blaylock. ITFC and Hawes Partners beneficially own approximately
50.6% and 49.4%, respectively, of the outstanding capital stock of
International, and Hawes Partners beneficially owns approximately 65% of
the outstanding capital stock of ITFC. Consequently, the 17,390,294 shares
of Common Stock owned of record and beneficially by International may also
be deemed to be beneficially owned by each of ITFC, Hawes Partners and
Messrs. Hawes and Blaylock, and are reflected accordingly in the table
above for their respective ownership positions. Each of ITFC, Hawes
Partners and Messrs. Hawes 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 Cruises and Tours, Inc. and
I.T. Cruise, Inc., 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 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.
(2) 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.
(3) These shares are pledged as collateral on a note payable to Mr. Snadon's
former wife.
(4) Includes a vested option to acquire 500,000 shares.
THE SALE OF THE CRUISE BUSINESS
Background
General. In 1996, the Company was faced with a local option election in
Louisiana which could have potentially eliminated the Company's revenue
producing assets, its truck stop video poker casinos. In an effort to diversify,
the Company acquired its Cruise Business from International Tours, Inc.
("International").
As the travel industry began to change amid numerous consolidations and the
rapid expansion of internet travel, each of International and the Company began
to reevaluate their positions in the travel industry. Since the travel
businesses of the two companies were intertwined, the companies agreed to
jointly look for consolidation opportunities. In January 1998, at a meeting in
the offices of International, E.H. Hawes, II, Chief Executive Officer of the
Company, agreed with Ron Blaylock, President of International, that Mr. Blaylock
should head up such search.
In March 1998, after several telephone conversations, International and the
Company entered into a Letter of Intent to sell all of their travel assets to
TravelPlus, a subsidiary of Points North Digital Technologies, Inc. ("Points
North"), a Canadian company. Bill Kerby, Chief Executive Officer of Travelbyus,
was chairman of Points North at such time. The closing was anticipated to occur
during the second quarter of 1998. During the second quarter of 1998, the
Company retained MBD Capital of Santa Monica, California, to help evaluate
Points North because the Company was considering accepting common stock in
addition to cash. In June 1998, the closing was extended to November 1998 and
then further extended until December 10, 1998. On December 10, 1998,
International and the Company were notified that the Board of Points North had
not agreed to the terms of the funding necessary to close the transaction and
therefore Points North would not close the sale.
In late January 1999, Mr. Kerby met with Messrs. Hawes and Blaylock in
Dallas and notified them that he was leaving Points North and would be starting
a new company. Mr. Kerby then outlined his plan to acquire various travel and
technology companies. Messrs. Blaylock and Hawes expressed an interest in the
project. Over the next eight weeks, Messrs. Blaylock and Hawes had numerous
telephone conversations with Mr. Kerby and agreed to consider a proposal to sell
the travel assets of International and the Company pursuant to terms similar to
those discussed the previous year. However, International and the Company would
require a non-refundable deposit of $200,000. On March 23, 1999, a
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Letter of Intent was executed and the sum of $200,000 was paid jointly to
International and the Company. The closing was scheduled for on or before June
30, 1999.
During June 1999, Mr. Kerby had numerous telephone conversations with
Messrs. Hawes and Blaylock informing them of the status of the financing being
sought by Travelbyus to close the acquisition, among other things. Mr. Kerby
informed them that the June 30 deadline was not viable. On July 15, Mr. Hawes
and Ted C. Parker, Jr., President of GalaxSea Cruises and Tours, Inc.
("GalaxSea") and I.T. Cruise, Inc. ("IT Cruise"), met with Mr. Kerby in Los
Angeles, California. The parties agreed that the closing would be extended for
60 days from June 30 in exchange for $50,000 additional non-refundable deposit,
payable on or before August 1, 1999. The extension was also contingent on
Travelbyus placing at least $4.5 million (Canadian) in debentures.
Subsequent to this meeting, from August 10-13, 1999, Messrs. Blaylock and
Parker and an accountant from both International and the Company traveled to
Winnipeg, Manitoba, Canada for meetings with the investment bankers and
attorneys putting together the private debenture placement by Travelbyus. Each
of the four presented the Company's Board of Directors with a report upon their
return. During July and August 1999, Mr. Hawes also had numerous discussions
with MBD Capital regarding the structure of the transaction.
Upon notification by Travelbyus to International and the Company that the
debenture placement had been finalized, both International and the Company
orally agreed to extend the closing deadline indefinitely as long as all parties
diligently pursed closing. From September 27-30, 1999, Messrs. Blaylock and
Parker met with Mr. Kerby and the attorneys for Travelbyus in Toronto to
finalize the terms of the agreement. Pursuant to those meetings, final documents
were prepared and the closing documents were executed on October 15, 1999.
Reasons for Sale. Mr. Hawes discussed each meeting with Mr. Kerby outlined
above with each of the Company's Board members. He advised each member that the
Company's Cruise Business had not performed as expected in 1997 and 1998 and
expected to break even in 1999. He further reported to the Board that the
Company had been unable to expand the GalaxSea franchise system as expected. In
addition, the structure of the cruise industry had changed significantly since
the Company's entry in that back end overrides from the cruise industry had been
greatly reduced. This accounted for a significant drop in cruise revenue to the
Company. Mr. Hawes also advised the Board that the changing face of the
industry, primarily the expansion of internet travel, required the Company to
either find new strategic partners or make a significant investment in the
technology aspect of the business. Mr. Hawes advised that Mr. Blaylock had had
discussions with several other travel consortia, including the largest travel
consortia in the U.S., and determined that IT Cruise and GalaxSea did not fit
the criteria for these consortia that would maximize the value to be received by
the Company. In view of these alternative discussions and in view of the current
performance of the Company's Cruise Business, it was determined that it was in
the best interests of the Company to sell its Cruise Business for the value of
approximately $1,800,000.
Mr. Hawes then discussed the issue of accepting cash and stock in
Travelbyus rather than taking all cash. The Board determined that in view of the
market's treatment of internet related travel companies, an equity position in
Travelbyus could provide the Company with an immediate upside that might
increase the value received for the Cruise Business.
Mr. Hawes then discussed the financial situation of the Company and the
effect thereupon by the Sale. The Company has several capital expenditure
requirements in the near future. First, it must address the past due note to
International of approximately $1,000,000. Second, the Company may need cash to
settle its dividend and debenture obligations to its former preferred
stockholders. Third, the Company may need additional cash to satisfy its 25%
share of any capital requirements over and above financing on the River Port
Truck Stop Casino. The Sale of the Cruise Business will enable the Company to
address certain of these needs.
In view of the previous restructuring of the Company's interest in its
Louisiana gaming properties, it also is in the Company's best interest to reduce
its operating overhead. The Sale of the Cruise Business will allow the Company
to reduce its corporate overhead.
Description of Travelbyus
Travelbyus is a Toronto Stock Exchange listed company that was formerly in
the mining business in various locations in North America. As of December 31,
1998, Travelbyus had no significant operating assets. In early 1999,
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Travelbyus sold an approximate 50% equity stake for $2 million (Canadian).
During this time, Travelbyus also entered into several letters of intent with
various travel and technology companies. In the third quarter of 1999,
Travelbyus placed $11.95 million (Canadian) in debentures. Using the proceeds
from this placement, as well as its capital stock, Travelbyus has acquired and
is in the process of acquiring various travel and technology related companies
pursuant to a plan to become a publicly traded, full integrated travel and
technology company. Travelbyus has acquired a discount air consolidator company,
a tour wholesaler, a website/technology company, a media marketing company and
assets of a television travel show, in addition to the travel assets of the
Company and International, since August 1999.
The address and telephone number of the principal effective office of
Travelbyus is Suite 204, 3237 King George Highway, South Surrey, British
Columbia V4P1B7, (604) 541-2400.
The Purchase Agreement
General. The Company entered into a Purchase of Assets Agreement (the
"Purchase Agreement") on October 15, 1999 with Travelbyus, International and two
of the Company's subsidiaries, GalaxSea and IT Cruise. Under the Purchase
Agreement, each of International and GalaxSea sold substantially all of their
respective cruise related assets to Travelbyus and the Company sold to
Travelbyus the stock of IT Cruise owned by the Company, representing 100% of the
outstanding stock of IT Cruise.
The purchase and sale of the assets of International funded and closed on
October 15, 1999, with an effective date of October 1, 1999. The purchase and
sale of assets of GalaxSea and the stock of IT Cruise closed into escrow on
October 15, 1999. The only condition to the release of escrow and the closing
becoming effective is the mailing of this Information Statement to the
stockholders of the Company. Escrow will be released and the closing will become
effective 20 days after the first mailing of this Information Statement to the
Company's stockholders (the "Effective Date"), but with a financial and
accounting effective date to relate back to October 1, 1999. In the interim, the
Company has entered into a management agreement pursuant to which Travelbyus
will manage the Cruise Business pending the Effective Date.
Assets Sold. The assets to be sold include machinery, equipment, fixtures,
furniture, prepaid expenses, intellectual property rights (including the name
"GalaxSea"), licenses, computer software, books and records and third-party
agreements and supply contracts existing at October 1, 1999. The assets to be
sold do not include cash, accounts receivable or intra-company indebtedness
existing at October 1, 1999.
Purchase Price. The Company received $1,333,334 in cash and 666,667 shares
of common stock of Travelbyus, valued at $.75 per share (an aggregate of
$500,000), as the purchase price for the Cruise Business. The cash was paid to
the Company, less an escrow reserve of $66,667, on October 15, 1999 and the
shares were placed in escrow until the Effective Date. International received
$666,667 in cash, less an escrow reserve of $33,333, and 333,333 shares of
common stock of Travelbyus as the purchase price for its cruise related assets.
Allocation of Purchase Price. The Company and International agreed upon the
allocation of the aggregate purchase price two-thirds to the Company and one-
third to International based on the following factors: (1) historical financial
operating statements; (2) the cruise segment versus the tour segment of the
leisure travel industry; (3) the relative values of the companies to Travelbyus;
and (4) the relative asset values of the respective companies on a going forward
basis. No fairness opinion was obtained and no other third-party appraisal or
review was conducted to arrive at the allocation between the Company and
International. The Board of Directors of the Company and International decided
they were capable of evaluating the factors to be taken into account to
determine the allocation of the aggregate purchase price, and determined that
the expense of engaging an investment banking firm or another third party review
of the transaction and allocation was not necessary. The Board considered that
the minority stockholders will have no voice in the decision to sell the Cruise
Business, and in the absence of dissenters' rights of appraisal, the minority
stockholders will be bound by the decision of the Board and the Written Consent
of the five stockholders who approved the Sale, four of whom are affiliates of
International. However, the Board did not believe such limitation justified the
expense of a fairness opinion or other third party review, and did not believe
that the absence of such opinion or review adversely affected its internal
determination of fairness. Therefore, the Board decided to proceed without a
fairness opinion or other third party review. Based upon all of the foregoing
factors discussed, the Board determined that the Sale of the Cruise Business and
the allocation of the aggregate purchase price between the Company and
International was fair to, and in the best interests of, the Company's
stockholders.
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Shares of Travelbyus Not a Long-Term Investment. The 666,667 shares of
common stock of Travelbyus received by the Company represents approximately 1.3%
of the outstanding common stock of Travelbyus as of November 15, 1999. The
Company considers these shares to be equivalent to cash and does not presently
intend to hold them as a long term investment or distribute them to the
stockholders of the Company. Instead, the Company presently intends to sell
these shares on the Toronto Stock Exchange, where the shares of Travelbyus are
listed, as soon as it can do so in an orderly disposition, in order to maximize
the Company's return on the shares, in accordance with the rules of the Toronto
Stock Exchange.
Conditions to the Sale. As noted above under "The Purchase Agreement -
General," there are no conditions to the Sale becoming effective, other than the
mailing of this Information Statement to the stockholders of the Company. The
Sale will automatically become effective 20 days after the first mailing of this
Information Statement to the Company's stockholders.
Representations and Warranties; Indemnification. In the Purchase Agreement,
the Company made customary representations and warranties to Travelbyus
including as to financial statements and matters, tax matters, environmental
matters, pending or threatened litigation, compliance with applicable laws,
title to assets, third party approvals, status of employee benefit plans and
employee compensation arrangements, intellectual property, absence of changes,
and labor relations. In the Purchase Agreement, Travelbyus made customary
representations and warranties to the Company including third party approvals
and existing and pending litigation.
The Purchase Agreement also provides customary indemnification obligations.
Specifically, each of the parties has agreed to indemnify the other in
connection with inaccuracies, breaches and non-fulfillment of any of the
representations and warranties made, and covenants and agreements to be
performed under the Purchase Agreement, by the Company or Travelbyus (which have
varying periods of survival ranging from 18 months following the date of the
Purchase Agreement to unlimited survival). The Company has also agreed to
indemnify Travelbyus in connection with any retained liabilities, and Travelbyus
has agreed to indemnify the Company in connection with any assumed liabilities.
The Company agreed that $66,667 of the purchase price could be placed into an
escrow reserve by Travelbyus until October 1, 2000, and Travelbyus will have the
right to offset any indemnification obligation of the Company against such
reserve.
Expenses. The Purchase Agreement provides that each party will pay all of
the fees and expenses incurred by it (including the fees and expenses of
counsel) in connection with the negotiation, execution and delivery and
performance of the Purchase Agreement and the transactions contemplated by the
Purchase Agreement.
Non-Competition Agreement
The Company agreed not to compete in the Cruise Business for a period
ending on October 13, 2004 anywhere in North America. The Company also agreed to
hold confidential all confidential and proprietary information and trade secrets
of the Cruise Business sold to Travelbyus.
Accounting Treatment
The effective date of the Sale of the Cruise Business will relate back to
October 1, 1999. Consequently, the transaction will be recorded as a disposition
of assets in the fourth quarter of 1999. The sales proceeds exceed the net book
value of the assets sold and, therefore, the Company will realize a gain from
the Sale effective October 1, 1999.
Federal Income Tax Consequences
For Federal income tax purposes, the Company will report a gain equal to
the excess of the sales proceeds over the net book value of the assets sold. The
gain is a taxable transaction.
No Change in Rights of Holders of Company's Common Stock
There will be no change in the Common Stock or in the rights of the holders
of Common Stock as a result of the Sale of the Company's Cruise Business.
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Stockholder Approval
The Company is a Delaware corporation. The Sale of the Cruise Business may
be deemed to constitute a sale of substantially all of the assets of the Company
under Delaware law, which requires the approval by stockholders holding a
majority of the outstanding shares of Common Stock. Consequently, the Company
determined that it should obtain stockholder approval, which was granted by
virtue of the five stockholders executing the Written Consent who own 20,902,012
shares of Common Stock, representing approximately 62.2% of the issued and
outstanding shares of Common Stock. Consequently, the required stockholder
approval has been obtained, but such approval will not become effective until
the Effective Date.
Rights of Dissenting Stockholders
Under Delaware, dissenting stockholders do not have any statutory appraisal
or other rights of appraisal relating to the approval of the Sale of the Cruise
Business by holders of a majority of the issued and outstanding shares of Common
Stock of the Company.
No Regulatory Approval Required
No federal or state regulatory approval is required to consummate the Sale
of the Cruise Business by the Company.
Market Price for the Company's Common Stock
The Company's Common Stock is traded over-the-counter and quoted from time
to time in the OTC Bulletin Board "pink sheets". On October 14, 1999, the day
before the announcement of the execution of the Purchase Agreement, the bid and
asked prices reported by the OTC Bulletin Board on that day were $.04 and
$.09375, respectively.
Interest of Certain Persons in Sale
As of September 30, 1999, the Company owed International $992,525 on a
promissory note with an original principal balance of $1,400,000. The Company is
in arrears for the full $992,525, but International agreed in March 1999 to
allow the Company to continue to accrue the balance owed until January 1, 2000,
as long as the Company made payments with excess cash flow, as available, prior
to such date. The Company plans to use $800,000 of the proceeds from the Sale of
the Cruise Business to make a substantial payment on the International note.
Until the International note is paid in full, all payments are suspended on the
subordinate debentures owed by the Company to former holders of 313,000 shares
of Class A Preferred Stock, which had aggregate remaining principal balances of
$514,067 and accrued interest of $115,572 as of September 30, 1999. The
subordinate debentures and the amounts unpaid are expressly made subordinate to
the International note as well as other senior debt of the Company.
International and I.T. Financial Corporation ("ITFC") were two of the five
stockholders of the Company who executed the Written Consent approving the Sale
of the Cruise Business. Hawes Partners is a partnership owned two-thirds by E.
H. Hawes, II (the President and Chief Executive Officer and a director of the
Company) and one-third by Ron Blaylock (the Chairman of IT Cruise and GalaxSea).
ITFC and Hawes Partners beneficially own approximately 50.6% and 49.4%,
respectively, of the outstanding capital stock of International, and Hawes
Partners beneficially owns approximately 65% of the outstanding capital stock of
ITFC. Mr. Blaylock is also the President and a director of International and
ITFC and Mr. Hawes is a director of International and ITFC.
As part of the sale of the Cruise Business, Mr. Blaylock entered into a two
year employment agreement with Travelbyus on October 13, 1999 providing a base
salary of $130,000 per year and other benefits not to exceed $40,000 per year,
together with a bonus to be negotiated.
Ted C. Parker, Jr., the President of IT Cruise and GalaxSea and one of the
Company's stockholders who executed the Written Consent approving the Sale of
the Cruise Business, will receive a fee of $133,333 payable by the Company in
return for his services relating to the negotiation and consummation of the Sale
and for surrendering to the Company 500,000 shares of Common Stock owned by Mr.
Parker. Mr. Parker will also receive $64,000 from
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International as a fee for his services relating to the negotiation and
consummation of the sale of assets by International.
CERTAIN INFORMATION CONCERNING THE COMPANY
General
The Company's 1998 Annual Report is also being furnished to stockholders
concurrently with this Information Statement. Stockholders are directed to the
Annual Report for a discussion of the Company's business and other information
relative to the Company, including the Company's audited financial statements.
In addition to the information contained in the Annual Report, the Company has
set forth below certain additional information.
Termination of Video Poker Casino Operations at The Diamond Jubilee
OM Operating, LLC ("Operator") operated the video poker casino at The
Diamond Jubilee Truck Stop in east New Orleans, Louisiana, until August 17, 1999
pursuant to a Sublease Agreement (the "Casino Sublease") dated July 1, 1996
between Operator and New Orleans Video Poker, Inc. ("NOVP"). 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"). Operator attempted to renegotiate the Operator's Agreements on
terms more favorable to Operator, but Doussan was not able to reach an agreement
with Operator concerning these terms, so Operator elected to terminate the
Operator's Casino Sublease effective August 17, 1999.
Certain Information Relating to Common Stock
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.
<TABLE>
<CAPTION>
Bid Price
Calendar Years ------------------
by Quarter High Low
-------------- ------------------
<S> <C> <C> <C>
1999 First $ 1/20 $1/32
Second 1/16 1/32
Third 1/25 1/32
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
</TABLE>
At September 30, 1999, the Company had approximately 3,150 common
stockholders of record.
The Company has not paid cash dividends on Common Stock during the last two
fiscal years or during 1999 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
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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. As
discussed, above, under "The Sale of Assets--Interests of Certain Persons in
Sale", the Company is $992,525 in arrears on the promissory note payable to
International. The Company is also $447,018 in arrears on accumulated dividends
on its former Class A Preferred Stock. These accumulated dividends will not be
paid until the International note and the subordinated debentures payable to
former holders of Class A Preferred Stock are paid in full and, thereafter, will
be payable in full prior to any distributions on the Common Stock.
Financial Statements
Included elsewhere in this Information Statement are unaudited interim
financial statements of the Company at September 30, 1999 and for the nine
months ended September 30, 1999 and 1998, together with unaudited pro forma
financial statements showing the effect of the Sale of the Cruise Business. See
"Index to Financial Statements", below. Stockholders should also review the
audited financial statements of the Company contained in the accompanying 1998
Annual Report.
Management's Discussion and Analysis or Plan of Operation
Liquidity and Capital Resources
Present Cash Shortfall. As of September 30, 1999, the Company was twenty
four months in arrears (a total of $992,525 of principal) in payments to
International on the promissory note issued to International by the Company as
partial consideration for a 1996 acquisition. The note had an original principal
balance of $1,400,000, requires monthly payments of principal and interest of
$50,000, and was secured by a pledge of the outstanding capital stock of IT
Cruise and GalaxSea owned by the Company. Approximately $800,000 of the cash
proceeds from the Sale of the Cruise Business will be used to reduce the amounts
owed to International under this note.
International agreed to allow the $1,119,346 accrued and owed to it at
March 22, 1999 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. The application of approximately $800,000 of the cash
proceeds from the Sale of the Cruise Business will reduce the note
substantially. However, until 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 accrued interest of
$115,572 at September 30, 1999 and required 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
September 30, 1999, 29 monthly payments, for a total of $297,342 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.
The structure of Operator and the various interests (including revenue and
profits interests) of the Company in Operator are being reviewed by the
Louisiana Gaming Control Board. Any adverse ruling by the Louisiana Gaming
Control Board could further compound the Company's cash flow situation and
possibly result in the inability to meet its scheduled debt payments, even as
revised. The Company does not believe the review will result in material adverse
changes in Operator's structure, but it cannot predict the results of the review
until the review is completed. Strict enforcement of the Louisiana Act and the
perceived anti-gaming sentiment in Louisiana within certain segments of the
population and with certain politicians may also impact the review of Operator
and any possible restructuring of Operator, or even a possible loss of
Operator's license to operate the video poker casinos.
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 and application of proceeds from the Sale of the
Cruise Business. While the Company believes it will be able to generate and
obtain the necessary capital to meet such needs if it is able to satisfactorily
restructure its payment obligations as described above, there can be no
assurance that all of such capital will be available on terms acceptable to the
Company, which could delay or cause the Company to postpone certain planned
activities.
General Condition. The Company ended the third quarter of 1999 with
$117,415 in cash and other current assets amounting to $175,289, including
accounts receivable of $118,343, prepaid expenses of $11,296 and other assets
-9-
<PAGE>
of $45,650. The Company also reflects an asset of $204,522, representing the
Company's equity investment in previously wholly-owned subsidiaries. The
Company's total liabilities were $2,244,381 at September 30, 1999 including
accounts payable and accrued liabilities of $274,626, current notes payable of
$1,212,432, long-term notes payable of $310,305 and preferred stock dividends
payable of $447,018. The current portion of other notes payable totaling
$1,212,432 includes debt with contractual maturities of less than one year and
the current portion of long term debt. See discussion of "--Present Cash
Shortfall" above.
Effective June 10, 1996, the Company acquired GalaxSea and IT 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 IT 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.
Results of Operations
Nine Months Ended September 30, 1999 Compared to Nine Months Ended
September 30, 1998
The Company's operations resulted in a net income before taxes of $541,563
for the nine months ended September 30, 1999, an increase of 355% from 1998's
$118,940. A gain on sale of assets was recorded during the nine months ended
September 30, 1999 of $597,857, primarily the results of the restructuring of
Operator and River Port Truck Stop, LLC ("River Port LLC"). The Company's
operating profit before depreciation, amortization, interest and other
revenue/expense amounted to $256,415 through September 30, 1999, down 76% from
1998's $1,063,095. This decrease is due to the change in financial reporting as
a result of the restructuring of Operator and River Port LLC.
The following comparisons are based on the operational results of the
Company and the underlying third quarter operations of Operator and River Port
LLC, the entities in which the Company holds an equity investment, and the Gold
Rush Truck Stop in which the Company owns a 50% beneficial interest. This
presentation is to provide comparable video poker and retail operation results
for the nine months ended September 30, 1999.
Revenues totaled $15,680,064 through September 30, 1999 compared to
$18,793,606 for 1998, down 17% (including approximately $8,978,000 of revenue
generated by Operator, River Port LLC and the Gold Rush Truck Stop during the
six months ended September 30, 1999, which is included in the income from equity
investments for the same period in the accompanying financial statements). (See
the unaudited condensed statements of income in Note 3 to the financial
statements of the Company included elsewhere in this Information Statement.)
Video Poker revenues totaled $10,375,125 through September 30, 1999, down
$1,381,093, or 12% from 1998's $11,756,218. The primary reason for the loss in
revenues is due to the discontinuation of operations at King's Lucky Lady in
Port Barre, Louisiana, and The Diamond Jubilee in New Orleans, Louisiana.
Revenue losses totaled approximately $1,224,000 and $134,000, respectively, at
these two facilities. Revenue increases were achieved at the Pelican Palace of
approximately $251,000 and at the Gold Rush of $78,423 and a loss of
approximately $156,000 at the remaining casinos.
Retail revenues from fuel and convenience store, food and beverage
operations amounted to $4,637,473 for the nine months ended September 30, 1999,
compared to 1998's $6,318,292, a decrease of 27%. The King's Truck Stop and
convenience store contributed approximately $1,531,243 to 1998's revenue, and
made minimal contributions in 1999 prior to the Company's discontinuation of
this facility. Declines in revenue of approximately $150,000 were recorded at
the remaining truck stops.
Cruise revenues accrued for IT Cruise and GalaxSea totaled $667,466 for the
nine months ended September 30, 1999 compared to 1998's $719,096, down 7%.
-10-
<PAGE>
Cost of revenues totaled $10,202,605 through September 30, 1999 compared to
$12,075,810 for 1998, down 16% (including approximately $9,000,000 of costs of
revenue generated by Operator, River Port LLC and the Gold Rush Truck Stop
during the nine months ended September 30, 1999, which is included in the income
from equity investments for the same period in the accompanying financial
statements). (See the unaudited condensed statements of income in Note 3 to the
financial statements of the Company included elsewhere in this Information
Statement.)
Video poker operations recorded a direct cost of revenue amounting to
$6,042,939 in 1999 and $6,658,629 in 1998, a decrease of 9%. The primary reason
for the decrease in costs was due to the decline in revenue. As a percentage of
revenue, video poker costs increased to 58% from 57% as a result of increased
profit share payments for the nine months ended September 30, 1999.
Retail operations (fuel, convenience store, food and beverage) recorded
cost of revenue of $3,853,406 for the nine months ended September 30, 1999
compared to $5,138,234 for 1998, a decrease of $1,284,828 or 25%, due to
discontinued operations at King's Truck Stop as of March 31, 1999. As a
percentage of retail revenues, total cost of revenues increased to 83% from 81%.
In order to comply with State regulations governing truck stops, the
Company continued to be very competitive in its marketing and pricing of fuel
during the first nine months of 1999, 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.
Cruise operations recorded a direct cost of revenue amounting to $306,260
for the first nine months ended September 30, 1999, compared to 1998's $278,947,
an increase of 10%. Significant improvement has been demonstrated in the
marketing/promotional area. Also, previous third party commission commitments
have expired.
Combined Cruise Operations recorded a gross profit totaling $361,260, while
1998's gross profit was $440,149, a decrease of $78,889, or 18%. The loss in
margin was for the most part due to a restructuring of contracts by certain
cruise lines. Marketing fees accrued are the result of a broad based program
coordinated by GalaxSea to produce cruise industry publications and promotions
subscribed to by the cruise lines. The GalaxSea franchise system included 70
franchisees at September 30, 1999 compared to 75 at the end of the third quarter
of 1998.
Other expenses totaled $4,557,190 through September 30, 1999, compared to
$6,598,791, down 32% (including approximately $2,475,000 of other expenses
generated by Operator, River Port LLC and the Gold Rush Truck Stop during the
six months ended September 30, 1999, which is included in the income from equity
investments for the same period in the accompanying financial statements). (See
the unaudited condensed statement of income in Note 3 to the financial
statements of the Company included elsewhere in this Information Statement.)
General operating and administrative expenses of $4,621,615 in 1999 and
$5,654,635 in 1998 represented 29% and 30% of total revenue for 1999 and 1998,
respectively. The decrease amounted to $1,033,020 or 18%. Discontinuation of
operations at Kings Truck Stop resulted in a reduction of $727,000 of general
and administrative expense in addition to $158,000 at River Port Truck Stop now
being leased to RVC Operations.
Depreciation and amortization amounted to $442,104 for the nine months
ended September 30, 1999 and $463,107 in 1998. Interest expense was $265,627 in
1999 and $215,001 in 1998. Net other revenue/(expense) was $66,936 in 1999,
compared to ($266,047) in 1998. Income from equity investments in the amount of
$107,363 was recorded beginning April 1, 1999, representing the Company's share
of net income/loss in gaming and truck stop ventures. A gain on sale of assets
was recorded totaling $597,857.
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
-11-
<PAGE>
vendors. Operator and River Port LLC operate, or will operate, video poker
devices under licenses granted by the Louisiana State Police Video Gaming
Division. Operator currently operates 191 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 1999
and will require software upgrades for all video poker "Clerk Validation
Terminals". The mandatory chip upgrade was complete during the second quarter of
1999 to coincide with Year 2000 compliance. The chip cost totaled $3,000 and
will require Operator to spend approximately $18,600 to $24,800 on hardware, and
it is anticipated that to complete the conversion Operator will also incur an
estimated amount of $15,000 for labor and testing. The second major system which
controls 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 fourth quarter of 1999.
The BIOS upgrades for all older personal computers to ensure that the units will
comply is in place. In addition, custom application programs, written
internally, will also require an upgrade at an estimated cost of $10,000. It is
also anticipated that to complete the conversion and upgrade, certain hardware
purchases might be necessary if old equipment fails to meet the new standards.
The Company estimates that this could cost up to $20,000.
The Company's current plan contemplates expenditures totaling $90,000 to
implement all conversions to meet year 2000 compliance, of which $15,000 has
been expended through September 30, 1999.
Forward Looking Statements
Statements that are not historical facts included in this Information
Statement 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, 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 Information Statement. 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 and regulatory developments and
compliance. 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.
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
Sartain Fischbein & Co. served as the Company's principal independent
public accountants for 1998 and has been selected to by the Company to serve in
fiscal 1999. Representatives of Sartain Fischbein & Co. are expected to be
present at the 1999 annual meeting of stockholders with the opportunity to make
a statement if they so desire and will be available to respond to appropriate
questions.
Arthur Anderson LLP served as the Company's independent public accountants
for 1997. On December 4, 1998, the Company received a letter from 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
-12-
<PAGE>
Company's statements herein have been filed with the Securities and Exchange
Commission. 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.
DOCUMENTS INCORPORATED BY REFERENCE
The following items contained in the Company's 1998 Annual Report, which
accompanies this Information Statement, are incorporated by reference and
stockholders are encouraged to review such items:
. Item 1 - Description of Business
. Item 2 - Description of Property
. Item 3 - Legal Proceedings
. Item 6 - Management's Discussion and Analysis or Plan of Operation
. Item 7 - Financial Statements
By Order of the Board of Directors
December 23, 1999 E.H. Hawes, II
President
-13-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
--------
PRO FORMA COMBINED FINANCIAL STATEMENTS (unaudited)
Introduction to Pro Forma Consolidated Financial Information..............F-2
Pro Forma Consolidated Balance Sheet - September 30, 1999.................F-3
Pro Forma Consolidated Statement of Operations For the
Nine Months Ended September 30, 1999..................................F-4
Pro Form Consolidated Statements of Operations For The
Year Ended December 31, 1998.........................................F-5
Notes to Pro Forma Consolidated Financial Information.....................F-6
Financial Statements of North American Gaming and
Entertainment Corporation and Subsidiaries
Introduction to Unaudited Historical Financial Statements.................F-7
Unaudited Consolidated Balance Sheet - September 30, 1999.................F-8
Unaudited Consolidated Statements of Operations -
Nine Months Ended September 30, 1999 and 1998.........................F-9
Unaudited Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1999 and 1998........................F-10
Notes to Unaudited Consolidated Financial Statements...............F-11 - F-26
F-1
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The unaudited pro forma financial information as of September 30, 1999 and for
the nine months ended September 30, 1999 and the year then ended December 31,
1998 is set forth on the following pages. The pro forma financial information
has been prepared utilizing the historical consolidated financial statements of
North American Gaming and Entertainment Corporation and Subsidiaries. The pro
forma consolidated financial information gives pro forma effect to the sale of
the Company's cruise related assets (the "Sale") as if the Sale had occurred on
September 30, 1999 for balance sheet purposes and as of January 1, 1999 and
January 1, 1998 for purposes of the pro forma statement of operations for the
nine months ended September 30, 1999 and the year ended December 31, 1998,
respectively. The pro forma information has been prepared utilizing estimates
and assumptions as set forth below and in the notes thereto. The pro forma
financial information is presented for informational purposes and is not
necessarily indicative of the future financial position or results of operations
of the Company that would have actually occurred had the Sale been consummated
on such dates or as of the period described above. The pro forma adjustments
are described in the accompanying notes and are based upon available information
and certain assumptions that the Company believes are reasonable.
These pro forma adjustments represent the Company's preliminary determination of
the Sale adjustments and are based upon available information and certain
assumptions that the Company believes to be reasonable. Consequently, the
amounts in the pro forma financial information are subject to change, and the
final amounts may differ substantially.
F-2
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET
================================================================================
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unaudited Unaudited
Historical Pro Forma Adjustments Pro Forma
September 30, ---------------------------------- September 30,
ASSETS 1999 Debit Credit 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Current Assets:
Cash $ 117,415 (a) $ 250,000 $ -- $ 1,316,739
(b) 949,324 --
Accounts receivable, net 118,343 -- -- 118,343
Prepaid expenses 11,296 -- -- 11,296
Notes receivable - current 15,650 -- -- 15,650
Current deferred tax asset 30,000 -- -- 30,000
-------------- -------------- -------------- --------------
Total Current Assets 292,704 1,199,324 -- 1,492,028
-------------- -------------- -------------- --------------
Property and Equipment, net 43,919 -- (a) 20,541 23,378
-------------- -------------- -------------- --------------
Other Assets:
Deposits 43,877 -- (a) 22,300 21,577
Long-term deferred tax asset 266,500 -- -- 266,500
Tradename, net 82,714 -- (a) 82,714 --
Goodwill and merger costs, net 439,145 -- (b) 439,145 --
Investments 204,522 (b) 720,000 -- 924,522
-------------- -------------- -------------- --------------
1,036,758 720,000 544,159 1,212,599
-------------- -------------- -------------- --------------
Total Assets $ 1,373,381 $ 1,919,324 $ 564,700 $ 2,728,005
============== ============== ============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable and accrued expenses $ 274,626 $ -- (c) $ 130,500 $ 405,126
Notes payable - current 1,212,432 495 -- 1,211,937
Preferred stock dividends payable 447,018 -- -- 447,018
-------------- -------------- -------------- --------------
Total Current Liabilites 1,934,076 495 130,500 2,064,081
Long-Term Debt 310,305 -- -- 310,305
-------------- -------------- -------------- --------------
Total Liabilities 2,244,381 495 130,500 2,374,386
-------------- -------------- -------------- --------------
Stockholders' Equity (Deficit):
Common stock 336,210 -- -- 336,210
Additional paid in capital 466,959 -- -- 466,959
Accumulated deficit (1,674,169)(c) 130,500 (a) 124,940 (449,550)
-- (b) 1,230,179
-------------- -------------- -------------- --------------
(871,000) 130,500 1,355,119 353,619
-------------- -------------- -------------- --------------
Total Liabilities and Stockholders' Deficit $ 1,373,381 $ 130,995 $ 1,485,619 $ 2,728,005
============== ============== ============== ==============
</TABLE>
See notes to unaudited pro forma consolidated financial information
F-3
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
================================================================================
Nine Months Ended September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unaudited Unaudited
Historical Pro Forma Adjustments Pro Forma
September 30, -------------------------------- September 30,
1999 Debit Credit 1999
------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Revenues:
Video poker $ 4,128,171 $ - $ - $ 4,128,171
Truck stop and convenience store 1,905,959 - - 1,905,959
Cruise 667,466 (d) 667,466 - -
------------- ------------ ------------ --------------
6,701,596 667,466 - 6,034,130
------------- ------------ ------------ --------------
Costs And Expenses:
Cost of revenue 4,189,265 - (d) 306,206 3,883,059
General and administrative 2,255,916 - (d) 398,250 1,857,666
Depreciation and amortization 319,259 - (d) 47,215 272,044
------------- ------------ ------------ --------------
6,764,440 - 751,671 6,012,769
------------- ------------ ------------ --------------
Operating Income (Loss) (62,844) 667,466 751,671 21,361
Other Revenue (Expense):
Other revenue (expense) 66,936 (d) 135,969 - (203,033)
(e) 134,000 -
Interest expense (167,749) - (d) 213 (167,536)
Income from equity investments 107,363 - - 107,363
Gain on sale of assets 597,857 - (e) 134,000 731,857
------------- ------------ ------------ --------------
604,407 269,969 134,213 468,651
------------- ------------ ------------ --------------
Income Before Taxes 541,563 937,435 885,884 490,012
Income Taxes (216,471) - (d) 11,034 (205,437)
------------- ------------ ------------ --------------
Net Income (Loss) $ 325,092 $ 937,435 $ 896,918 $ 284,575
============= ============ ============ ==============
Basic Income Per Share $ 0.01 $ 0.01
============= ==============
Basic Weighted Average Shares
Outstanding 36,313,542 36,313,542
============= ==============
Diluted Income Per Share $ 0.01 $ 0.01
============= ==============
Diluted Weighted Average Shares
Outstanding 36,313,542 36,313,542
============= ==============
</TABLE>
See notes to unaudited pro forma consolidated financial information
F-4
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
================================================================================
Year Ended December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unaudited
Historical Pro Forma Adjustments Pro Forma
December 31, ---------------------------------- December 31,
1998 Debit Credit 1998
------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Video poker $ 15,704,231 $ - $ - $ 15,704,231
Truck stop and convenience store 8,679,063 - - 8,679,063
Cruise 966,442 (f) 966,442 - -
------------- -------------- -------------- -------------
25,349,736 966,442 - 24,383,294
------------- -------------- -------------- -------------
Costs And Expenses:
Cost of revenue 16,354,213 - (f) 417,610 15,936,603
General and administrative 7,789,585 - (f) 730,564 7,059,021
Depreciation and amortization 617,755 - (f) 63,134 554,621
------------- -------------- -------------- -------------
24,761,553 - 1,211,308 23,550,245
------------- -------------- -------------- -------------
Operating Income (Loss) 588,183 966,442 1,211,308 833,049
Other Revenue (Expense):
Other revenue (expense) (494,767)(f) 65,820 - (560,587)
Interest expense (307,187) - (f) 835 (306,352)
Income from equity investments - - - -
Gain on sale of assets - - - -
------------- -------------- -------------- -------------
(801,954) 65,820 835 (866,939)
------------- -------------- -------------- -------------
Income Before Taxes (213,771) 1,032,262 1,212,143 (33,890)
Income Taxes (39,979) - (f) 7,100 (32,879)
------------- -------------- -------------- -------------
Net Income (Loss) $ (253,750) $ 1,032,262 $ 1,219,243 $ (66,769)
============= ============== ============== =============
Basic and Diluted Loss Per Share $ (0.01) $ (0.00)
============= =============
Basic and Diluted Weighted Average
Shares Outstanding 31,980,331 31,980,331
============= =============
</TABLE>
See notes to unaudited pro forma consolidated financial information
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL INFORMATION
================================================================================
The unaudited pro forma consolidated financial information should be read in
conjunction with the Company's historical consolidated financial statements
appearing in the Company's 1998 Annual Report accompanying this Information
Statement and the unaudited financial statements at September 30, 1999 and for
the nine months ended September 30, 1999 and 1998, which appear elsewhere in
this Information Statement.
On October 15, 1999, the Company entered into an agreement to sell the cruise
related assets of Galaxsea Cruises and Tours, Inc. ("Galaxsea") for $285,000.
In addition, the Company agreed to sell I.T. Cruise, Inc. ("I.T.") for
$1,048,324 and 666,667 shares of common stock with a fair value of $720,000.
The sales transaction is effective October 1, 1999.
The unaudited pro forma adjustments are as follow:
a. Adjustment to record the sale of Galaxsea assets for $250,000.
b. Adjustment to record the sale of I.T. for $949,324 cash, and 666,667
shares of common stock with a fair value of $720,000.
c. To accrue selling expenses.
d. To eliminate the cruise related income and expenses as if the sale had
taken place January 1, 1999.
e. To record the $35,000 and $99,000 of cash deposits previously received by
Galaxsea and I.T., respectively, as part of the gain on sale.
f. To eliminate the cruise related income and expenses as if the sale had
taken place January 1, 1998.
F-6
<PAGE>
Unaudited Historical Financial Statements
In the opinion of North American Gaming and Entertainment Corporation and
Subsidiaries (the Company), the following unaudited consolidated financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position of the Company at
September 30, 1999 and the results of their operations and changes in cash flows
for the nine months ended September 30, 1999 and 1998 are not necessarily
indicative of the results to be expected for the full year.
F-7
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1999 (Unaudited)
ASSETS
- ------
CURRENT ASSETS:
Cash $ 117,415
Accounts receivable (net) 118,343
Prepaid Expenses 11,296
Notes receivable - current 15,650
Current deferred tax asset 30,000
----------
TOTAL CURRENT ASSETS 292,704
----------
PROPERTY AND EQUIPMENT, net of accumulated depreciation 43,919
----------
OTHER ASSETS:
Deposits 43,877
Long-term deferred tax asset 266,500
Trade name and contract rights, net of accumulated amortization 82,714
Goodwill and merger costs 439,145
Investments 204,522
----------
1,036,758
----------
TOTAL ASSETS $1,373,381
==========
LIABILITY AND STOCKHOLDERS' DEFICIT
- -----------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 274,626
Notes payable - current 1,212,432
Preferred stock dividends payable 447,018
----------
TOTAL CURRENT LIABILITIES 1,934,076
NOTES PAYABLE-LONG-TERM 310,305
----------
TOTAL LIABILITIES 2,244,381
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 8,000,000 shares designated series "B" no
shares issued and authorized -
Common stock, $.01 par value, 100,000,000 shares authorized,
33,620,920 and 41,788,552 shares issued and outstanding
at September 30, 1999 and December 31, 1998 336,210
Additional paid-in-capital 466,959
Retained earnings (deficit) (1,674,169)
----------
TOTAL STOCKHOLDERS' DEFICIT (871,000)
----------
TOTAL LIABILITIES & STOCKHOLDERS' DEFICIT $1,373,381
==========
The accompanying notes are an integral part of the financial statements
================================================================================
F-8
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED September 30, 1999 and 1998 (Unaudited)
1999 1998
------------ ------------
REVENUE:
Video Poker Revenue $ 4,128,171 $11,756,218
Truck Stop and Convenience Store 1,905,959 6,318,292
Cruise Revenue 667,466 719,096
----------- -----------
6,701,596 18,793,606
COST AND EXPENSES:
Cost of revenue 4,189,265 12,042,249
General and administrative expenses 2,255,916 5,688,262
Depreciation and Amortization 319,259 463,107
----------- -----------
6,764,440 18,193,618
OPERATING INCOME (LOSS) (62,844) 599,988
----------- -----------
OTHER REVENUE (EXPENSE)
Other revenue (expense) 66,936 (266,047)
Interest expense (167,749) (215,001)
Income from equity investments 107,363 -
Gain on sale of assets 597,857 -
----------- -----------
INCOME BEFORE PROV. FOR INCOME TAXES 541,563 118,940
PROVISION FOR INCOME TAXES (216,471) (84,600)
----------- -----------
NET INCOME $ 325,092 $ 34,340
=========== ===========
BASIC INCOME PER SHARE $ * $ *
=========== ===========
BASIC WEIGHTED AVERAGE
SHARES OUTSTANDING 36,313,542 41,788,552
=========== ===========
DILUTED INCOME PER SHARE $ * $ *
=========== ===========
DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING $36,313,542 $41,788,552
=========== ===========
*Less than $.01 per share
The accompanying notes are an integral part of the financial statements
F-9
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED September 30, 1999 and 1998 (Unaudited)
1999 1998
---------- ------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $ 325,092 $ 34,340
Adjustments to reconcile net income to net cash:
Depreciation and amortization 319,259 463,107
Deferred tax expense 111,500 -
Gain on disposal of assets (597,858) -
Income from equity investments (107,363) -
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (34,525) 85,438
Inventories (12,177) 5,720
Prepaid insurance/expenses 25,544 28,750
Deposits 1,320 (739,446)
Increase (decrease) in:
Accounts payable and accrued liabilities (37,209) 229,513
--------- ---------
Net cash provided (used) by operating activities (6,417) 107,422
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (345,611) (173,142)
Proceeds from Kings sale of fixed assets 325,000 -
Proceeds to borrowers - 12,003
Repayment by borrowers 32,016 (7,746)
Purchase of intangibles - -
--------- ---------
Net cash provided (used) by investing activities 11,405 (168,885)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 125,887 -
Payments on borrowings (294,569) 242,988
--------- ---------
Net cash provided (used) by financing activities (168,682) 242,988
--------- ---------
NET INCREASE (DECREASE) IN CASH (163,694) 181,525
CASH - beginning of period 281,109 615,712
--------- ---------
CASH - ending of period $ 117,415 * $ 797,237
========= =========
*($770,008 of which is included in assets of
Business that the majority interest was
Transferred under contractual agreement)
The accompanying notes are an integral part of the financial statements
F-10
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
================================================================================
1. INTERIM FINANCIAL STATEMENTS (UNAUDITED)
In the opinion of North American Gaming and Entertainment Corporation and
Subsidiaries (the Company), the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position of the Company at
September 30, 1999 and the results of their operations and changes in cash flows
for the nine months ended September 30, 1999 and 1998. The results of
operations for the nine months ended September 30, 1998 and 1998 are not
necessarily indicative of the results to be expected for the full year.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
The accompanying unaudited consolidated financial statements include the
accounts of North American Gaming and Entertainment Corporation, a Delaware
corporation (NAGEC), its wholly owned subsidiaries, GalaxSea Cruises and Tours,
Inc. ("Galexsea"), and I.T. Cruise, Inc. ("IT") (collective the Company) and
River Port Truck Stop, Inc. (RPI), Ozdon Investments, Inc. (Ozdon) and
consolidated minority interests in OM Operating, LLC (OM), and River Port Truck
Stock, LLC (RPLLC) through March 31, 1999 (See Note 3).
The Company's operations for the three months ended March 31, 1999 consisted of
the truck stop facilities and/or video poker casinos in five truck stops, and
the video poker devices for a route of 4 bars and restaurants, all located in
the state of Louisiana. From April 1, 1999 to September 30, 1999, the Company
received income from its equity investment in OM which operated three video
poker casinos and one bar operation. The Company also operates in the cruise
travel business.
Use of Estimates: The preparation of unaudited 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.
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.
F-11
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
================================================================================
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
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 63% of the
- --------------
Company's operating revenue for the nine months ended September 30, 1998.
During the nine months ended September 30, 1999, video poker revenues represent
approximately 65% of operating revenues of its minority owned casino operations.
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. 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 September 30, 1998
because of the relatively short maturity of these instruments.
The carrying amounts of notes payable and debt issued approximate fair value as
of September 30, 1998 because interest rates on these instruments approximate
market interest rates.
3. 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.
F-12
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
================================================================================
3. MINORITY INTERESTS (CONTINUED)
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 would receive a fee of $400,000 per year.
Additionally, Williams and OM entered into a five year Employment Agreement
pursuant to which Williams would 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 were 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 were payable to the Company as a reduction of accrued interest on
the Note and then principal until such time as Williams allocation of profits
was sufficient to pay-off the Note.
F-13
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
================================================================================
3. MINORITY INTERESTS (CONTINUED)
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 March 31, 1999. The principal balance outstanding on the Note
at March 31, 1999 remained at $4,000,000.
The restructure under the Amendment included an assignment of ownership
interests by the Company which did not qualify for sale treatment under
applicable accounting rules until Williams' share of distributions of cash flow
resulted in sufficient payments on the Note to make significant reductions
thereof. Because of this, the assignment transaction and resulting $4,000,000
Note were not reflected in the consolidated financial statements. The Company
continued to consolidate the operations of OM until significant payments were to
be made on the Note.
In accordance with generally accepted accounting principles, 51% of the assets
and liabilities of OM were segregated as "Assets/Liabilities of business
transferred under contractual agreement" in the December 31, 1998 consolidated
balance sheet.
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 was 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 was paid in full, the Company had 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 had been paid in
full, managers would 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 would 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 was 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.
F-14
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
================================================================================
3. MINORITY INTERESTS (CONTINUED)
Williams and the Company were 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 should 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 March 31, 1999.
Restructure of OM and RPLLC: 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 were effective April 1, 1999 and cancelled the Note and the
Company's contribution of the 20% gross income allocation. In addition,
Williams 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 terminated the Company's 20% gross income
allocation in OM and caused 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 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 and cancel $255,072 of accrued
dividends on Class A Preferred Stock.
As of April 1, 1999, ownership of OM, RPLLC and the Gold Rush Truck stop were 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>
F-15
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
3. MINORITY INTERESTS (CONTINUED)
The Amendments constituted a transfer of ownership interest and control in all
of the Company's gaming operations. The transfer became effective April 1,
1999. At that time, the Company recorded its investment in OM, RPLLC and the
gold Rush Truck Stop under the equity method.
The following are condensed unaudited balance sheets for OM, RPLLC and the Gold
Rush Truck Stop as of September 30, 1999 and the condensed unaudited statements
of income for the nine months ended September 30, 1999.
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
(UNAUDITED)
September 30, 1999
Gold September
Assets OM RPLLC Rush Total 30, 1999
---------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Cash $ 638,000 $ - $174,000 $ 812,000 $ 398,000
Accounts receivable 215,000 12,000 49,000 276,000 200,000
Restricted cash - - - - 200,000
Prepaid expenses 51,000 7,000 1,000 59,000 40,000
Inventories 12,000 - 74,000 86,000 138,000
Notes receivable - - - - 17,000
Property and 181,000 1,962,000 478,000 2,621,000 1,086,000
equipment, net
Casino and truck stop
under construction - - - - 1,605,000
Intangibles and 171,000 7,000 28,000 206,000 375,000
other, net ---------- ---------- -------- ---------- ----------
Total Assets $1,268,000 $1,988,000 $804,000 $4,060,000 $4,059,000
========== ========== ======== ========== ==========
LIABILITIES
Accounts payable and
accrued liabilities $ 590,000 $ 254,000 $157,000 $1,001,000 $ 932,000
Notes payable 40,000 1,968,000 442,000 2,450,000 2,172,000
---------- ---------- -------- ---------- ----------
Total Liabilities 630,000 2,222,000 599,000 3,451,000 3,104,000
---------- ---------- -------- ---------- ----------
Capital 638,000 (234,000) 205,000 609,000 955,000
---------- ---------- -------- ---------- ----------
Total Liabilities $1,268,000 $1,988,000 $804,000 $4,060,000 $4,059,000
and Capital ========== ========== ======== ========== ==========
</TABLE>
F-16
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
================================================================================
3. MINORITY INTERESTS (CONTINUED)
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
Nine Months Ended
September 30, 1999
------------------
Revenues $15,013,000
Costs of revenue (9,896,000)
General and administrative (4,068,000)
-----------
Operating income 1,049,000
Interest expense, net (151,000)
Other income (expense) (419,000)
-----------
Net income $ 479,000
===========
4. PROPERTY AND EQUIPMENT
Property and equipment include the following at September 30, 1999:
Leasehold Improvements $ 6,000
Furniture and Equipment 125,000
--------
131,000
Less Accumulated Depreciation (87,000)
--------
Property and Equipment - Net $ 44,000
========
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities as of September 30, 1999 include the
following:
Trade accounts payable and other $121,000
Accrued payroll and payroll taxes 34,000
Accrued interest payable 120,000
--------
$275,000
========
F-17
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
================================================================================
6. 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 unaudited 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
unaudited consolidated statements of operations are as follows:
Nine Months Ended September 30,
-----------------------------------
1999 1998
-------- -------
Current- Federal $ 95,000 $ -
Current-State 9,000 -
Deferred 112,000 85,000
-------- -------
$216,000 $85,000
======== =======
Components of the net deferred tax asset at September 30, 1999 are as follows:
Deferred tax assets:
Net operating loss carryforwards $1,025,000
Vacation accrual 21,000
Other, net 9,000
----------
Total deferred tax assets 1,055,000
Less - valuation allowance (759,000)
----------
Net deferred tax assets $ 296,000
==========
At September 30, 1999, the Company had a net operating loss carryforward
available for Federal income tax purposes of approximately $2,892,000. 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.
F-18
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
================================================================================
6. INCOME TAXES (CONTINUED)
The following is a reconciliation of the U. S. statutory tax rate to the
Company's effective rate for the years ended September 30, 1998 and 1997:
1998 1997
---- ----
Statutory rate 34.0% 34.0%
Goodwill amortization - 50.7
State income taxes 2.5 -
Other 3.5 (13.6)
---- ----
Company's effective rate 40.0% 71.1%
==== ====
7. NOTES PAYABLE
September
30, 1999
-----------
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 $ 992,525
Notes payable to certain stockholders, interest of 9%, payable
in equal monthly installments until maturity on June 1, 2003.
The notes are unsecured. 514,067
Other 16,350
-----------
1,522,942
Less: Current Portion (1,212,432)
-----------
Long-Term Portion $ 310,510
===========
The amounts due in subsequent years are as follows:
September 30, Total
------------- ----------
2000 $1,212,432
2001 131,974
2002 144,354
2003 34,182
----------
Total $1,522,942
==========
F-19
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
================================================================================
7. NOTES PAYABLE (CONTINUED)
Debt Restructuring: As of September 30, 1999, 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 $992,525 at September 30, 1999, 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 $541,067 at
September 30, 1999. These notes require aggregate payments of principal and
interest of approximately $13,5000 per month, and are expressly made subordinate
to the International note as well as other senior debt of the Company.
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 3) and have 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 3). 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 effect on
the Company's business operations and financial condition.
F-20
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
================================================================================
8. CONCENTRATIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 periods ended September 30, 1999 and 1998, the Company
was in violation of this regulation. This regulation was not being enforced in
1999 and 1998. 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 by the Company through
March 31, 1999 and OM from April 1, 1999 to September 30, 1999 equal 32.5% of
net gaming device revenue.
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.
F-21
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
================================================================================
9. STOCKHOLDERS' DEFICIT (CONTINUED)
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.
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
- -------------
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 1999
and 1998.
The following is a table of options granted:
Exercise
Price Per
Options Share
--------- -----------
Balance, December 31, 1998 1,000,000 $ .30
========= ===========
Balance, September 30, 1999 1,000,000 $ .30
========= ===========
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 1999 or 1998 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
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
================================================================================
10. CONTRACTS
OM currently has three gaming and/or truck stop establishments as well as video
poker route operations in Louisiana. Through March 31, 1999, the Company
consolidated the operations of OM (See Note 3). Therefore, the Company, through
its consolidated subsidiary OM, was the operator until March 31, 9999 when it
sold a portion of its interest in OM. The gaming contracts assign various
percentages of the gaming revenues of these establishments to various property
owners, lessors or lenders. When the OM 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 a percentage of the net gaming income. In addition, the OM has a
revenue sharing agreement on a single location (Gold Rush) which operates
similar to the other gaming contracts, but Ozdon owns the truck stop facility.
Below is a listing of the gaming contracts OM has at September 30, 1999, 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 a gaming contract with a bar. This contract
- -----------------
provides the establishment's owners with 50% of the net gaming income.
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.
As of April 1, 1999, the Company and OM will no longer operate King's Lucky Lady
Truck Stop and the video poker casino as a result of settlement of litigation
involving this truck stop. Under the terms of the settlement, the Company and
OM received $325,000 as proceeds for the sale of all video poker related
equipment and inventory of the escrow fund and were entitled to 20% of the net
profits of King's Lucky Lady for the month of March 1999.
The Lucky Longhorn Club: During 1993, the Company purchased the right to
- ------------------------
operate the gaming devices of this establishment. 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
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
================================================================================
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: Ozdon owns this truck stop facility which is currently
- ---------------------
operated by OM.
OM is required, to pay a former lender ten percent (10%) of net gaming income as
long as OM continues to operate the gaming establishment in St. Landry Parish,
Louisiana. In addition, in the event that Ozdon 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. In August 1999, the company and OM no
longer operated the Diamond Jubilee.
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. Construction of
the River Port Truck Stop convenience store was completed in January 1999.
F-24
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
================================================================================
10. CONTRACTS (CONTINUED)
During 1999, RPLLC entered into a fifteen year operating agreement with a third
party to operate the convenience store, restaurant and truck stop. 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.
Final design and permitting for the casino were completed during May 1999 and
construction commenced in June 1999, with completion targeted for the end of the
fourth quarter of 1999.
Rent expense under the gaming leases was as follows:
<TABLE>
<CAPTION>
January 1, 1999 April 1, 1999 to
to March 31, 1999 September 30, 1999* September 30, 1999
----------------- ------------------- ------------------
<S> <C> <C> <C>
Kings Lucky Lady $ 91,000 $ - $ 257,000
The Longhorn Club 335,000 566,000 953,000
Pelican Palace 242,000 413,000 553,000
Gold Rush Truck Stop 53,000 309,000 157,000
Diamond Jubilee 199,000 333,000 689,000
RPLLC 21,000 42,000 63,000
-------- ---------- ----------
$941,000 $1,663,000 $2,672,000
======== ========== ==========
</TABLE>
* Represents period after the Company sold a portion of their interest in OM,
the operator.
Consulting Agreements: In April 1998, the Company entered into a four year
- ----------------------
consulting agreement with OM. The agreement required 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.
In conjunction with the restructuring of OM and RPLLC, the agreements were
terminated effective April 1, 1999 (see Note 3).
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.
In conjunction with the restructuring of OM and RPLLC, the annual salary was
reduced effective April 1, 1999 to $100,000 per year (See Note 3).
F-25
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
================================================================================
10. CONTRACTS (CONTINUED)
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 called for annual base rent of $400,000.
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 (See Note 3).
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 nine months
ended September 31, 1999 and 1998.
12. SUBSEQUENT SALE OF CRUISE DIVISION
On October 15, 1999, the Company entered into an agreement to sell all of its
cruise related assets. The purchase price is $1,333,334 in cash and 666,667
shares of common stock of the purchaser. The sale has been approved by written
consent of a majority of the outstanding shares of the Company's common stock.
The cash portion of the purchase price has been paid to the Company, but the
shares of purchaser's common stock shares, $66,667 in cash and the assets being
sold by the Company have been placed in escrow pending the dissemination of an
Information Statement to the remaining stockholders of the Company. After
dissemination of the Information Statement, the sale will be consummated with an
effective date of October 1, 1999.
F-26
================================================================================
<PAGE>
Appendix A
WRITTEN CONSENT
OF THE HOLDERS OF A MAJORITY OF THE
OUTSTANDING SHARES OF COMMON STOCK OF
NORTH AMERICAN GAMING AND
ENTERTAINMENT CORPORATION
The undersigned, constituting holders of at least a majority of the
outstanding shares of common stock of North American Gaming and Entertainment
Corporation (the "Company"), hereby take the following corporate actions by
written consent:
RESOLVED, that the Company is authorized and directed to enter into a
"Purchase of Assets" agreement (the "Agreement") with Travelbyus-IT
Incorporated, Travelbyus-GalaxSea Incorporated and Travelbyus.com Ltd.
(collectively the "Purchaser"), and International Tours, Inc., GalaxSea
Cruises and Tours, Inc. and IT Cruise, Inc., pursuant to which
International Tours, Inc. and GalaxSea Cruises and Tours, Inc. sell all or
substantially all of their assets, and the Company sells the outstanding
stock of IT Cruise, Inc., to the Purchaser in consideration of an aggregate
of U.S. $2,000,000 in cash and 1,000,000 shares of common stock of
Travelbyus.com Ltd. upon the terms and conditions set forth in the
Agreement received by the Company on October 1, 1999 as such Agreement may
be modified and further negotiated by the parties thereto; and the officers
of the Company are authorized and directed to further negotiate and modify
such Agreement upon the terms and conditions as they, in their sole
discretion, deem advisable, along with the other agreements and instruments
contemplated thereby, and to execute and deliver such other agreements and
instruments and the Agreement as so further modified and negotiated; and
the signature of the officers thereon shall be conclusive evidence of the
authorization and approval thereof by the Company.
RESOLVED FURTHER, that the consummation of the transactions involving
the Company under the Agreement shall become effective without further
action on the earlier of (i) March 31, 2000 or (ii) twenty days after the
mailing by the Company of an Information Statement to the shareholders of
the Company in accordance with the rules and regulations of the Securities
and Exchange Commission.
RESOLVED FURTHER, that the officers of the Company are authorized and
directed to take such further actions and to negotiate and execute any such
further documents and instruments as they, in their sole discretion, deem
necessary or advisable to place the foregoing resolutions into effect and
to otherwise consummate the transactions contemplated by the Agreement and
any documents or instruments contemplated thereby.
Executed effective as of the moment that a majority of the outstanding
shares of common stock have executed this Written Consent as evidenced by the
date of the signatures below. This Written Consent may be executed in one or
more counterparts, and all of such counterparts shall constitute one and the
same instrument. Facsimile signatures shall be considered original signatures.
INTERNATIONAL TOURS, INC.
By: /s/ Ron Blaylock
----------------------------------------
Ron Blaylock, President
Number of Common Shares Owned: 17,390,294
Date: October 11, 1999
A-1
<PAGE>
IT FINANCIAL CORP.
By: /s/ Ron Blaylock
----------------------------------------
Ron Blaylock, President
Number of Shares Owned: 232,326
Date: October 11, 1999
/s/ Ted C. Parker, Jr.
----------------------------------------
Ted C. Parker, Jr., Individually
Number of Shares Owned: 1,243,334
Date: October 12, 1999
/s/ Keith Weber
----------------------------------------
Keith Weber, Individually
Number of Shares Owned: 93,729
Date: October 12, 1999
/s/ Lamar E. Ozley, Jr.
----------------------------------------
Lamar E. Ozley, Jr., Individually
Number of Shares Owned: 1,942,329
Date: October 12, 1999
A-2
<PAGE>
NORTH AMERICAN
GAMING & ENTERTAINMENT
CORPORATION
1998 Annual Report
<PAGE>
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
----- -----
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
----- -----
<PAGE>
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
-i-
<PAGE>
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
-ii-
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION
PART I
ITEM 1. DESCRIPTION OF BUSINESS
- --------------------------------
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
-1-
<PAGE>
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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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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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
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<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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<PAGE>
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 $ - $ - - $63,125/(1)/
Chief Executive 1997 - - - 37,500/(1)/
Officer 1996 - - -
- --------------------
(1) Represents a consulting fee paid by the Company under a Consulting
Agreement which terminated January 14, 1998. Since January 14, 1998, Mr.
Hawes has received no compensation from the Company.
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Option/SAR Grant Table
(Option/Warrant/SAR Grants in Last Fiscal Year)
Number of
Securities Percent of
Underlying Total Market
Options or Option/Warrant Exercise Price
Warrants Granted to or on Date
Granted Employees in Base Price of Grant Expiration
Name # Fiscal Year ($/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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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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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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<PAGE>
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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<PAGE>
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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<PAGE>
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.
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<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.
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<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.
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<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>
CORPORATE INFORMATION
OFFICERS AND DIRECTORS INDEPENDENT AUDITORS
North American Gaming Sartain Fischbein & Co.
and Entertainment Corporation 3010 South Howard Avenue
Suite 400
E.H. Hawes, II Tulsa, Oklahoma 74114
Chairman and Chief Executive Officer
Dallas, Texas
LEGAL COUNSEL
Richard P. Crane, Jr.
Director and Secretary Glast, Phillips & Murray
Partner - Musick, Peeler & Garrett 2200 One Galleria Tower
Los Angeles, California 13355 Noel Road, LB 48
Dallas, Texas 75240
Daryl N. Snadon
Director CORPORATE OFFICES
President - Beltway Development Company
Addison, Texas 13150 Coit Road, Suite 125
Dallas, Texas 75240
(972)671-1133
(972)671-1134
I.T. Cruise, Inc. and GalaxSea
Cruises and Tours, Inc.
Ron Blaylock
Chairman
Dallas, Texas
Ted C. Parker, Jr.
President
Dallas, Texas
For further information and a copy of the Company's Form 10KSB contact:
Susan Vasquez
13150 Coit Road, Suite 125
Dallas, Texas 75240
(972) 671-1133, extension 224
<PAGE>
TRAVELBYUS-IT INCORPORATED
AND
TRAVELBYUS-GALAXSEA INCORPORATED
PURCHASE OF ASSETS
OF
INTERNATIONAL TOURS, INC.
AND
GALAXSEA CRUISES AND TOURS, INC.
AND
PURCHASE OF SHARES OF
I. T. CRUISE, INC.
October 13, 1999
1
<PAGE>
THIS AGREEMENT is made as of the 13/th/ day of October, 1999.
A M O N G:
INTERNATIONAL TOURS, INC., a corporation incorporated under the laws
of the State of Oklahoma
("International Tours")
OF THE FIRST PART
- AND -
GALAXSEA CRUISES AND TOURS, INC., a corporation incorporated under the
laws of the State of Oklahoma
("GalaxSea")
OF THE SECOND PART
("International Tours" and "GalaxSea" sometimes
individually referred as a "Vendor" and
collectively as the "Vendors")
- AND -
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION, a corporation incorporated
under the laws of the State of Delaware
("NAGE")
OF THE THIRD PART
- AND -
TRAVELBYUS.COM LTD., a corporation incorporated
under the laws of the Province of Ontario
("Travelbyus")
OF THE FOURTH PART
2
<PAGE>
- AND -
TRAVELBYUS-IT INCORPORATED, a corporation
incorporated under the laws of the State of Delaware
("Travelbyus-IT")
OF THE FIFTH PART
- AND -
TRAVELBYUS-GALAXSEA INCORPORATED, a
corporation incorporated under the
laws of the State of Delaware
("Travelbyus-GalaxSea")
OF THE SIXTH PART
WHEREAS International Tours is engaged in the marketing of leisure travel
programs to its network of affiliated retail travel agencies and all business
ancillary thereto (the "International Tours Business"), I.T. Cruise, Inc. ("IT
Cruise"), is engaged in the marketing of cruise programs and promotions to
retail travel agencies affiliated with International Tours and all business
ancillary thereto (the "IT Cruise Business") and GalaxSea is engaged in the
marketing of cruise programs and promotions to retail travel agencies affiliated
with GalaxSea and all business ancillary thereto (the "GalaxSea Business");
AND WHEREAS the Vendors have agreed to sell to Travelbyus-IT and Travelbyus-
GalaxSea (collectively, the "Purchaser") and the Purchaser has agreed to
purchase from the Vendors certain property, assets and undertaking of the
Vendors relating to the Purchased Business (as hereinafter defined), all upon
and subject to the terms and conditions hereof and NAGE has agreed to sell to
Travelbyus-IT and Travelbyus-IT has agreed to purchase from NAGE, all of the
issued and outstanding shares of IT Cruise, all on and subject to the terms and
conditions hereof;
AND WHEREAS NAGE has a direct interest in GalaxSea and will benefit from the
sale of the GalaxSea Assets (as herein defined) and receipt of the GalaxSea
Purchase Price (as herein defined) and has accordingly agreed to provide certain
covenants, agreements, representations and warranties and indemnities in favour
of the Purchaser and Travelbyus as hereinafter provided;
3
<PAGE>
NOW THEREFORE THIS AGREEMENT WITNESSES THAT in consideration of the respective
covenants, agreements, representations, warranties and indemnities of the
parties herein contained and for other good and valuable consideration (the
receipt and sufficiency of which are acknowledged by each party), the parties
hereto hereby covenant and agree as follows:
ARTICLE 1 - INTERPRETATION
1.1 Defined Terms
For the purposes of this Agreement, unless the context otherwise requires, the
following terms shall have the meanings set out below and grammatical variations
of such terms shall have corresponding meanings:
(1) "Accounts Receivable" means all accounts receivable and trade accounts
receivable accruing after the Effective Date;
(a) "Affiliate" has the meaning set out in the OBCA;
(b) "Associate" has the meaning set out in the OBCA;
(c) "Assumed Liabilities" has the meaning set out in section 4.1;
(d) "Business Day" means any day, other than a Saturday or a Sunday, on
which the principal chartered banks located in Toronto, Canada are
open for business during normal banking hours;
(e) "Claim" has the meaning set out in section 11.3;
(f) "Clearance/Mailing Obligation" means the obligation of NAGE and
International Tours to:
(i) forthwith prepare an information circular in prescribed form
outlining the terms and conditions of the sale of the Purchased
Shares and the GalaxSea Assets, providing requisite disclosure
as to the business and affairs of the Purchaser and Travelbyus
and describing the written consent resolution of International
Tours as majority shareholder (the "Information Circular");
(ii) file forthwith after its prompt preparation the Information
Circular with the SEC;
4
<PAGE>
(iii) expeditiously and diligently clear any and all deficiencies
raised by the SEC; and
(iv) within 10 days after either; (a) clearance of the Information
Circular by the SEC; or (b) 10 days after the SEC has duly
received the Information Circular and has taken no action, to
mail the Information Circular (as revised or amended, if
applicable) to shareholders of NAGE in accordance with
requisite securities and corporate law and to advise the
Purchaser and Travelbyus in writing of the mailing date and the
date which will therefore be the Escrow Release Date;
(g) "Closing" means, as the case may be: (i) the consummation of the
purchase and sale of the International Tours Assets effective as of
the Effective Date commencing as of the Time of Closing on the Closing
Date; and (ii) the consummation in escrow (pursuant to the Closing
Escrow Agreement) of the purchase and sale of the Purchased Shares and
the GalaxSea Assets effective as of the Effective Date, commencing as
of the Escrow Release Date;
(h) "Closing Date" means October 13, 1999 or such other date as the
Vendors, NAGE, the Purchaser and Travelbyus may mutually determine;
(i) "Closing Escrow Agreement" means the Closing Escrow Agreement to be
entered into by the Parties and GPM on Closing with respect to the
Purchased Shares and the GalaxSea Assets;
(j) "Contract" means any agreement, indenture, contract, lease, deed of
trust, licence, option, instrument or other commitment, whether
written or oral;
(k) "Date Data" means any data or input which includes an indicate of or
reference to date;
(l) "Direct Claim" has the meaning set out in section 11.3;
(m) "Effective Date" means October 1, 1999;
(n) "Employee Plans" means all pension, retirement, disability, medical,
dental or other health insurance plans, life insurance or other death
benefit plans, any stock option, bonus or other incentive plans,
vacation benefit plans, severance plans or other employee benefit
plans or arrangements to which the applicable company is a party or by
which the applicable company is bound or with respect to which
payments or contributions the applicable company may otherwise have
any liability;
(o) "Encumbrance" means any encumbrance, lien, charge, hypothec, pledge,
5
<PAGE>
mortgage, title retention agreement, security interest of any nature,
adverse claim, exception, reservation, easement, right of occupation,
any matter capable of registration against title, option, right of
pre-emption, privilege or any Contract to create any of the foregoing;
(p) "Escrow Agent" means Montreal Trust Company of Canada;
(q) "Escrow Release Date" means the earlier of (i) the date upon which the
escrow pursuant to the Closing Escrow Agreement is released as a
result of NAGE's and International Tour's fulfilment of the
Clearance/Mailing Obligation, whereupon Closing of the purchase and
sale of the Purchased Shares shall be deemed to have occurred as of
the Time of Closing on the Closing Date and whereupon Closing of the
purchase and sale of the GalaxSea Assets shall be deemed to have
occurred as of the Effective Date; and (ii) March 31, 2000;
(r) "Excluded Assets" has the meaning set out in section 2.2;
(s) "Excluded Liabilities" has the meaning set out in section 4.2;
(t) "GalaxSea Assets" means the following property and assets used in
connection with or otherwise relating to the GalaxSea Business,
including for greater certainty and without limitation, those owned,
leased and/or operated by GalaxSea West;
Equipment. The machinery, equipment, fixtures, furniture, furnishings,
parts, and other fixed assets of or relating to or used in the
operation of the GalaxSea Business as described in Schedule
1.1(t)(i);
Prepaid Expenses. The prepaid expenses and the benefits thereof
relating to the GalaxSea Business as described in Schedule
1.1(t)(ii);
Agreements and Contracts. The rights under leases of personal and real
property (whether as lessee or lessor), orders or contracts for
the provision of goods or services (whether as buyer or seller),
distribution, associate, supplier, franchise and agency
agreements and all other Contracts of or relating to the GalaxSea
Business, described in Schedule 1.1(t)(iii) and all Accounts
Receivable with respect thereto;
Licences. All of the Licences described in Schedule 1.1(t)(iv) and
all Accounts Receivable with respect thereto;
Intellectual Property. All trade or brand names, business names,
trade marks, trade mark registrations and applications, service
marks,
6
<PAGE>
service mark registrations and applications, copyrights,
copyright registrations and applications, patents, internet
domain names and registrations, 1-800 telephone numbers,
patent registrations and applications and other patent rights
(including any patents issued on such applications or rights),
trade secrets, proprietary manufacturing information and know-
how, equipment and parts lists and descriptions, instructions
manuals, inventions, inventors' notes, research data,
unpatented blue prints, drawings and designs, formulae,
processes, technology and other intellectual property,
together with all rights under licences, registered user
agreements, technology transfer agreements and other
agreements or instruments relating to any of the foregoing
(collectively, the "Intellectual Property"), including without
limitation, the trademarks, business names, design marks,
copyrights, patents, licences and agreements described in
Schedule 1.1(t)(v);
Computer Software. The computer software, including all rights under
licences and other agreements or instruments relating thereto
set out in Schedule 1.1(t)(vi);
Books and Records. All books and records (other than minute books and
related corporate records and those required by law to be
retained by GalaxSea, copies of which will be made available
to the Purchaser and Travelbyus, provided that the minute
books and related corporate records of GalaxSea West will be
provided to Travelbyus-GalaxSea on Closing) including without
limitation, customer lists, sales records, price lists and
catalogues, sales literature, vouchers, advertising and
related material, employee manuals, (but not personnel
records), supply records, inventory records and correspondence
files (together with, in the case of any such information that
is stored electronically, the media on which the same is
stored);
(viii) Goodwill. All goodwill, together with the exclusive right for
the Purchaser to represent itself as carrying on the GalaxSea
Business in succession to GalaxSea and GalaxSea West and the
right to use any words indicating that the GalaxSea Business
is so carried on, including the Purchaser's right to use the
name "GalaxSea", or any variation thereof, as part of the name
or style under which the GalaxSea Business or any part thereof
is carried on by the Purchaser; and
(ix) Shares. All of the issued and outstanding shares (the
"GalaxSea West Shares") in the capital of GalaxSea West
Corporation ("GalaxSea West").
7
<PAGE>
(u) "GalaxSea Business" has the meaning set out in the preambles to this
Agreement;
(v) "GalaxSea Financial Statements" means the unaudited financial
statements of GalaxSea as at the year ended December 31, 1998 and for
the six months ending June 30, 1999;
(w) "GalaxSea Purchase Price" has the meaning set out in section 2.1(b);
(x) "GalaxSea Transferred Employees" means the employees listed on
Schedule 1.1(x);
(y) "Governmental Authority" means any government, regulatory authority,
governmental department, agency, commission, board, tribunal, crown
corporation or court or other law, rule or regulation-making entity
having or purporting to have jurisdiction on behalf of any nation or
province or state or other subdivision thereof or any municipality,
district or other subdivision thereof;
(z) "GPM" means Glast, Phillips & Murray, PC;
(aa) "Holdback" means the US$100,000 to be placed in escrow pursuant to
the Representation and Warranty Escrow Agreement;
(bb) "Indemnified Party" has the meaning set out in section 11.3;
(cc) "Indemnifying Party" has the meaning set out in section 11.3;
(dd) "Information Circular" has the meaning set out in the definition of
Clearance/Mailing Obligation;
(ee) "Intellectual Property" has the meaning set out in subsection
1.1(t)(v);
(ff) "International Tours Assets" means the following property and assets
used in connection with or otherwise relating to the International
Tours Business;
Equipment. The machinery, equipment, fixtures, furniture,
furnishings, parts, and other fixed assets of or relating to or
used in the operation of the International Tours Business
described in Schedule 1.1(ff)(i);
Prepaid Expenses. The prepaid expenses and benefits thereof relating
to the International Tours Business described in Schedule
1.1(ff)(ii);
Agreements and Contracts. The rights under leases of personal and
real property (whether as lessee or lessor), orders or contracts
for the
8
<PAGE>
provision of goods or services (whether as buyer or seller),
distribution, associate, supplier, franchise, and agency
agreements and all other Contracts, of or relating to the
International Tours Business described in Schedule 1.1(ff)(iii)
and all Accounts Receivable with respect thereto;
Licences. All of the Licences described in Schedule 1.1(ff)(iv) and
all Accounts Receivable with respect thereto;
Intellectual Property. All Intellectual Property including without
limitation, the trademarks, business names, design marks,
copyrights, patents, licences and agreements described in
Schedule 1.1(ff)(v);
Computer Software. The computer software, including all rights under
licences and other agreements or instruments relating thereto
set out in Schedule 1.1(ff)(vi);
Books and Records. All books and records (other than minute books
and related corporate records and those required by law to be
retained by International Tours, copies of which will be made
available to the Purchaser and Travelbyus), including without
limitation, customer lists, sales records, price lists and
catalogues, sales literature, vouchers, advertising and related
material, sales records, employee manuals, (but not personnel
records), supply records, inventory records and correspondence
files (together with, in the case of any such information that
is stored electronically, the media on which the same is
stored); and
Goodwill. All goodwill, together with the exclusive right for the
Purchaser to represent itself as carrying on the International
Tours Business in succession to International Tours and the
right to use any words indicating that the International Tours
Business is so carried on, including the Purchaser's right to
use the name "International Tours", or any variation thereof, as
part of the name or style under which the International Tours
Business or any part thereof is carried on by the Purchaser;
(gg) "International Tours Business" has the meaning set out in the
preambles to this Agreement;
(hh) "International Tours Financial Statements" means the unaudited
financial statements of International Tours as at the year ended
December 31, 1998 and for the six months ended June 30, 1999;
9
<PAGE>
(ii) "International Tours Purchase Price" has the meaning set out in
section 2.1(a);
(jj) "International Tours Stock Component" has the meaning set out in
section 2.1(a);
(kk) "International Tours Transferred Employees" means the employees who
are listed in Schedule 1.1(kk);
(ll) "IT Cruise Assets" means all property and assets of IT Cruise,
including for greater certainty and without limitation, the
following:
Equipment. The machinery, equipment, fixtures, furniture,
furnishings, parts, and other fixed assets of or relating to or
used in the operation of the IT Cruise Business described in
Schedule 1.1(ll)(i);
Prepaid Expenses. The prepaid expenses and the benefits thereof
relating to IT Cruise described in Schedule 1.1(ll)(ii);
Agreements and Contracts. The rights under leases of personal and
real property (whether as lessee or lessor), orders or contracts
for the provision of goods or services (whether as buyer or
seller), distribution, associate, supplier, franchise and agency
agreements and all other Contracts of or relating to IT Cruise,
described in Schedule 1.1(ll)(iii) and all Accounts Receivable
with respect thereto;
Licences. All of the Licences described in Schedule 1.1(ll)(iv) and
all Accounts Receivable with respect thereto;
Intellectual Property. All Intellectual Property including without
limitation, the trademarks, business names, design marks,
copyrights, patents, licences and agreements described in
Schedule 1.1(ll)(v);
Computer Software. The computer software, including all rights under
licences and other agreements or instruments relating thereto
set out in Schedule 1.1(ll)(vi);
Books and Records. All books and records (including minute books and
related corporate records) including without limitation,
customer lists, sales records, price lists and catalogues, sales
literature, vouchers, advertising and related material, sales
records, employee manuals, (but not personnel records), supply
records, inventory records and correspondence files (together
with, in the case of any such information that is stored
electronically, the media on which the same is stored); and
10
<PAGE>
Goodwill. All goodwill;
(mm) "IT Cruise Business" has the meaning set out in the preambles to this
Agreement;
(nn) "IT Cruise Purchase Price" has the meaning set out in section 2.3;
(oo) "IT Cruise Cash Component" has the meaning set out in section 2.3;
(pp) "IT Cruise Financial Statements" means the unaudited financial
statements of IT Cruise as at the year ended December 31, 1998 and
for the six months ended June 30, 1999;
(qq) "IT Cruise Stock Component" has the meaning set out in section 2.3;
(rr) Intentionally Deleted;
(ss) "Leased Premises" has the meaning set out in section 6.1(h);
(tt) "Licences" means all licences, permits, approvals, consents,
certificates, registrations and authorizations (whether governmental,
regulatory or otherwise;
(uu) "LOI" means the letter agreement executed as of March 30, 1999
between the Vendors, IT Cruise, NAGE and Travelgateways.com Inc., as
amended April 7, 1999 and assigned to Travelbyus on July 23, 1999;
(vv) "Losses" means, in respect of any matter, all claims, demands,
proceedings, losses, damages, liabilities, deficiencies, costs and
expenses (including without limitation, all legal and other
professional fees and disbursements, interest, penalties and amounts
paid in settlement) arising directly or indirectly as a consequence
of such matter;
(ww) "Management Agreement" means the interim management agreement to be
entered into by GalaxSea, NAGE, IT Cruise, Travelbyus and the
Purchaser on Closing, which agreement shall be effective as of the
Effective Date;
(xx) "OBCA" means the Business Corporations Act, Ontario;
(yy) "Other Amounts" has the meaning set out in section 11.1(d);
(zz) "Parties" means collectively, the Vendors, NAGE, Travelbyus and the
Purchaser and "Party" means any one of them;
11
<PAGE>
(aaa) "Purchased Assets" means collectively the International Tours
Assets and the GalaxSea Assets;
(bbb) "Purchased Business" means collectively, the International Tours
Business and the GalaxSea Business;
(ccc) "Purchased Shares" means all of the issued and outstanding shares
in the capital of IT Cruise;
(ddd) "Purchaser" has the meaning set out in the preambles to this
Agreement;
(eee) "Representation and Warranty Escrow Agreement" means the
representation and warranty escrow agreement to be entered into by
the Parties and the Escrow Agent with respect to the Holdback;
(fff) "SEC" means the Securities and Exchange Commission;
(ggg) "Taxes" means and includes without limitation, all taxes, duties,
fees, premiums, assessments, imposts, levies and other charges of
any kind whatsoever imposed by any Governmental Authority,
together with all interest, penalties, fines, additions to tax or
other additional amounts imposed in respect thereof, including
without limitation, those levied on or measured by or referred to
as income, gross receipts, profits, capital transfer, land
transfer, sales, goods and services, use, value-added, excise,
stamp, withholding, business, franchising, property, payroll,
employment, health, social services, education and social security
taxes, all surtaxes, all customs duties and import and export
taxes, all license, franchise and registration fees and all
employment insurance, health insurance and United States and other
government pension plan premiums;
(hhh) "Third Party" has the meaning set out in section 11.3;
(iii) "Third Party Claim" has the meaning set out in section 11.3;
(jjj) "Time of Closing" means 10:00 a.m. (Toronto time) on the Closing
Date, or such other time on the Closing Date as the Parties may
mutually determine;
(kkk) "Travelbyus Financial Statements" means the audited financial
statements of Travelbyus as at the year ended December 31, 1998;
(lll) "TSE" means The Toronto Stock Exchange; and
(mmm) "WSE" means the Winnipeg Stock Exchange.
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1.2 Currency
Unless otherwise indicated, all dollar amounts in this Agreement are expressed
in United States funds.
1.3 Sections and Headings
The division of this Agreement into Articles, sections and subsections and the
insertion of headings are for convenience of reference only and shall not affect
the interpretation of this Agreement. Unless otherwise indicated, any reference
in this Agreement to an Article, section, subsection or Schedule refers to the
specified Article, section or subsection of or Schedule to this Agreement.
1.4 Number, Gender and Persons
In this Agreement, words importing the singular number only shall include the
plural and vice versa, words importing gender and words importing persons shall
include individuals, corporations, partnerships, associations, trusts,
unincorporated organizations, governmental bodies and other legal or business
entities of any kind whatsoever.
1.5 Accounting Principles
Any reference in this Agreement to generally accepted accounting principles
refers to generally accepted accounting principles that have been established in
the United States of America, including those approved from time to time by the
Financial Accounting Standards Board or any successor body thereto.
1.6 Entire Agreement
This Agreement together with the documents contemplated herein constitute the
entire agreement between the Parties with respect to the subject matter hereof
and supersede all prior agreements, understandings, negotiations and
discussions, whether written or oral including for greater certainty and without
limitation, the LOI. There are no conditions, covenants, agreements,
representations, warranties or other provisions, express or implied, collateral,
statutory or otherwise, relating to the subject matter hereof except as herein
provided.
1.7 Time of Essence
Time shall be the essence of this Agreement.
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1.8 Applicable Law
This Agreement shall be construed, interpreted and enforced in accordance with,
and the respective rights and obligations of the Parties shall be governed by,
the laws of the State of Texas and each Party irrevocably and unconditionally
submits to the non-exclusive jurisdiction of the state and federal courts
located in Dallas County, Texas and all courts competent to hear appeals
therefrom.
1.9 Successors and Assigns
This Agreement shall enure to the benefit of and shall be binding on and
enforceable by the Parties and, where the context so permits, their respective
successors and permitted assigns. No Party may assign any of its rights or
obligations hereunder without the prior written consent of the other Parties.
1.10 Amendments and Waivers
No amendment or waiver of any provision of this Agreement shall be binding on
any Party unless consented to in writing by such Party. No waiver of any
provision of this Agreement shall constitute a waiver of any other provision nor
shall any waiver constitute a continuing waiver unless otherwise provided.
1.11 Schedules
The following Schedules are attached to and form part of this Agreement:
<TABLE>
<S> <C> <C>
Schedule 1.1(t)(i) - Equipment etc. of the GalaxSea Business
Schedule 1.1(t)(ii) - Prepaid Expenses of the GalaxSea Business
Schedule 1.1(t)(iii) - Agreements and Contracts of the GalaxSea Business
Schedule 1.1(t)(iv) - Licenses of the GalaxSea Business
Schedule 1.1(t)(v) - Intellectual Property of the GalaxSea Business
Schedule 1.1(t)(vi) - Computer Software of the GalaxSea Business
Schedule 1.1(ff)(i) - Equipment etc. of the International Tours Business
Schedule 1.1(ff)(ii) - Prepaid Expenses of the International Tours Business
Schedule 1.1(ff)(iii) - Agreements and Contracts of the International Tours Business
Schedule 1.1(ff)(iv) - Licences of the International Tours Business
Schedule 1.1(ff)(v) - Intellectual Property of the International Tours Business
Schedule 1.1(ff)(vi) - Computer Software of the International Tours Business
Schedule 1.1(kk) - International Tours Transferred Employees
Schedule 1.1(ll)(i) - Equipment etc. of IT Cruise
Schedule 1.1(ll)(ii) - Prepaid Expenses of IT Cruise
Schedule 1.1(ll)(iii) - Agreements and Contracts of IT Cruise
Schedule 1.1(ll)(iv) - Licences of IT Cruise
Schedule 1.1(ll)(v) - Intellectual Property of IT Cruise
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
Schedule 1.1(ll)(vi) - Computer Software of IT Cruise
Schedule 1.1(x) - GalaxSea Transferred Employees
Schedule 2.2(a)(i) - Prepaid Fees, etc. of the GalaxSea Business
Schedule 2.2(a)(ii) - Prepaid Fees, etc. of the International Tours Business
Schedule 3.3 - Allocation of Purchase Price among Purchased Assets
Schedule 6.1(a) - Jurisdictions in which International Tours is authorized to carry on business
Schedule 6.1(d)(i)(A) - Third Party Contractual Consents for the International Tours Business
Schedule 6.1(f) - Location of the International Tours Assets
Schedule 6.1(p)(i) - International Tours Financial Statements
Schedule 6.1(p)(iii) - Competing Business of the International Tours Business
Schedule 6.1(r) - Legal and Regulatory Proceedings
Schedule 6.1(s) - Customers of the International Tours Business
Schedule 6.1(t) - Suppliers of the International Tours Business
Schedule 6.1(u) - Employee Plans and Collective Agreements of the International Tours Business
Schedule 6.2(a) - Jurisdictions in which IT Cruise is authorized to carry on business
Schedule 6.2(h) - Location of IT Cruise Assets
Schedule 6.2(j) - Authorized and Issued Capital of IT Cruise
Schedule 6.2(n) - Third Party Consents of IT Cruise
Schedule 6.2(r) - IT Cruise Financial Statements
Schedule 6.2(v) - Tax Disclosure of IT Cruise
Schedule 6.2(x) - Bank Accounts of IT Cruise
Schedule 6.2(aa)(iii) - Competing Business of the IT Cruise Business
Schedule 6.2(ac) - Customers of IT Cruise
Schedule 6.2(ad) - Suppliers of IT Cruise
Schedule 6.3(a) - Jurisdictions in which GalaxSea is authorized to carry on business
Schedule6.3(cc) - Bank Accounts of GalaxSea West
Schedule 6.3(d)(i)(A) - Third Party Contractual Consents for the GalaxSea Business
Schedule 6.3(e) - Location of the GalaxSea Assets
Schedule 6.3(o)(i) - GalaxSea Financial Statements
Schedule 6.3(o)(iii) - Competing Business of the GalaxSea Business
Schedule 6.3(r) - Customers of the GalaxSea Business
Schedule 6.3(s) - Suppliers of the GalaxSea Business
Schedule 6.3(t) - Employee Plans and Collective Agreements of the GalaxSea Business
Schedule 7.1(f) - Travelbyus Financial Statements
Schedule 10.1(d) - Third Party Contractual Consents for IT Cruise
Schedule 11 - Service Marks
Schedule 12 - Disclosures Regarding International Tours Customers
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
Schedule 13 - Disclosures Regarding International Tours Suppliers
Schedule 14 - Disclosures Regarding GalaxSea Suppliers
Schedule 15 - Disclosures Regarding Accounts Payable
</TABLE>
ARTICLE 2 - PURCHASE AND SALE
2.1 Purchase and Sale of Purchased Assets
-------------------------------------
Subject to the terms and conditions of this Agreement:
(a) International Tours shall convey, sell, assign and transfer to
Travelbyus-IT and Travelbyus IT shall purchase from International
Tours, effective as of the Effective Date commencing on the Time of
Closing on the Closing Date, the International Tours Assets, free and
clear of any and all Encumbrances, in exchange for the sum of
US$666,666 (the "International Tours Cash Component") and 333,333
common shares in the capital of Travelbyus(the "International Tours
Stock Component"); provided that on Closing the International Tours
Stock Component shall be placed in escrow pursuant to the Closing
Escrow Agreement, to be released on the terms and conditions therein
contained (the "International Tours Purchase Price"); and
(b) GalaxSea shall convey, sell, assign and transfer to Travelbyus-
GalaxSea and Travelbyus-GalaxSea shall purchase from GalaxSea
effective as of the Effective Date commencing on the Escrow Release
Date pursuant to the Closing Escrow Agreement, the GalaxSea Assets,
free and clear of any and all Encumbrances, in exchange for the sum of
US$285,000 (the "GalaxSea Purchase Price");
2.2 Excluded Assets
For greater certainty, and without limitation, the Purchased Assets shall not
include any of the following property and assets of the Vendors (collectively,
the "Excluded Assets"):
Cash. Save and except in respect of the prepaid fees, commissions and
royalties identified on Schedules 2.2(a)(i) and 2.2(a)(ii), (which
amounts will be paid on Closing to the Purchaser) all cash on hand or
in banks or other depositions of the Vendors as of the Effective Date;
Accounts Receivable. All Accounts Receivable due or accruing due to the
Vendors in connection with the International Tours Business and the
GalaxSea Business for the period arising prior to the Effective Date
including without limitation, pro-rated, accrued vendor productivity
bonuses;
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Inter-company Debt. All indebtedness of NAGE or IT Cruise and any of their
Associates or Affiliates to any of the Vendors or IT Cruise and/or all
indebtedness of any of the Vendors or IT Cruise and their Associates
or Affiliates to any of the Vendors, IT Cruise or NAGE as of the
Effective Date; and
Income Taxes. All income tax or payroll tax instalments paid by either of
the Vendors and the right to receive any refund of income taxes paid
by either of the Vendors as of the Effective Date.
2.3 Purchase and Sale of Purchased Shares
Subject to the terms and conditions of this Agreement, NAGE shall convey, sell,
assign and transfer to Travelbyus-IT and Travelbyus-IT shall purchase from NAGE,
effective as of the Effective Date commencing on the Escrow Release Date, the
Purchased Shares, free and clear of any and all Encumbrances, in exchange for
(the "IT Cruise Purchase Price") US$1,048,334 (the "IT Cruise Cash Component")
and 666,667 common shares in the capital of Travelbyus (the "IT Cruise Stock
Component").
ARTICLE 3 - PURCHASE
3.1 Purchase Price
The Purchase Price shall be satisfied by the payment of the International Tours
Purchase Price, the GalaxSea Purchase Price and the IT Cruise Purchase Price.
3.2 Payment of Purchase Price
At the Time of Closing, the Purchaser shall satisfy and pay the Purchase Price
to the Vendors and NAGE as follows:
Travelbyus-IT shall deliver to International Tours a certified cheque or
bank draft representing the International Tours Cash Component less
US$83,333 previously advanced as and by way of a deposit pursuant to
the LOI and less US$33,333 on account of the Holdback;
Travelbyus-GalaxSea shall deliver to GalaxSea a certified cheque
representing the GalaxSea Purchase Price less the sum of US$35,000
previously advanced as and by way of a deposit pursuant to the LOI and
less US$33,333 on account of the Holdback;
(a) Travelbyus-IT shall deliver to NAGE a certified cheque or bank
draft representing the IT Cruise Cash Component less US$131,667
previously advanced as and by way of a deposit pursuant to the
LOI and less
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<PAGE>
US$33,334 on account of the Holdback;
(b) Travelbyus-IT shall deliver to International Tours share certificates
representing the International Tours Stock Component and International
Tours shall forthwith deposit such share certificates with the Escrow
Agent pursuant to the Closing Escrow Agreement;
(c) Travelbyus-IT shall deliver to NAGE share certificates representing
the IT Cruise Stock Component and NAGE shall forthwith deposit such
share certificates with the Escrow Agent pursuant to the Closing
Escrow Agreement;
(d) the Purchaser shall deliver to the applicable Vendor a certified
cheque or bank draft in the amount of the prepaid deposits listed on
Schedules 1.1(t)(ii) and 1.1(ff)(ii) against delivery to the Purchaser
by the Vendors of a certified cheque or bank draft in the amount of
the prepaid fees listed on Schedules 2.2(a)(i) and 2.2(a)(ii); and
In addition to payment of the Purchase Price, the Purchaser shall deliver
to GalaxSea, International Tours IT Cruise and NAGE, as applicable,
certified cheques or bank drafts in an amount equal to payment made by
any of them after September 30, 1999 for expenses accruing and paid
after September 30, 1999 relating to the International Tours Business,
the GalaxSea Business and the IT Cruise Business.
3.3 Allocation of Purchase Price
Each of the Vendors and the Purchaser covenant and agree to allocate the
Purchase Price among the Purchased Assets in accordance with the terms and
conditions of this Agreement and specifically Schedule 3.3 and to report the
sale and purchase of the Purchased Assets for all federal, state and local tax
purposes in a manner consistent with such allocation. Travelbyus does hereby
covenant and agree that it is the understanding of Travelbyus that the general
accepted practice in the Province of Ontario, consistent with requisite
securities laws, rules and policies published by the Ontario Securities
Commission and various telephone conversations between counsel to Travelbyus and
the Ontario Securities Commission, is that securities issued outside of the
Province of Ontario (i.e. to non-residents of Ontario) will have a 90 day
restriction on their tradeability, subject always to requisite and applicable
rules relative to the holding and sale of stock by insiders of public companies
such as Travelbyus.
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<PAGE>
3.4 Transfer Taxes
The Purchaser shall be liable for and shall pay all federal and state sales
taxes (including any retail sales taxes) and all other taxes, duties, fees or
other like charges of any jurisdiction properly payable in connection with the
transfer of the Purchased Assets by the Vendors to the Purchaser.
3.5 Payment of Accounts Payable
Each Vendor hereby covenants and agrees to be responsible for and pay upon
demand by the creditor (unless payment has previously been made by suh Vendor or
is disputed in good faith by such Vendor) all debts, liabilities and obligations
in respect of or relating to the Purchased Business and the Purchased Assets of
such Vendor (exclusive of the Assumed Liabilities) up to and including the
Effective Date save and except as set forth on Schedule 15. At the request of
the Purchaser, the applicable Vendor shall provide written evidence of payment
of accounts payable. To the extent that there is a dispute with any particular
customer and/or supplier with respect to the validity of a particular account
payable (or a portion thereof), the applicable Vendor shall provide notice to
the Purchaser and Travelbyus together with particular details of such dispute
and the applicable Vendor and the Purchaser shall attempt to resolve the dispute
with the supplier, bearing in mind that such supplier may be a valued supplier
of the Purchased Business.
ARTICLE 4 - ASSUMPTION OF LIABILITIES
4.1 Assumption of Certain Liabilities by the Purchaser
Subject to the provisions of this Agreement, as part of the consummation of the
purchase and sale of the Purchased Assets, the Purchaser shall only assume and
pay in the normal course as they fall due and discharge, perform and fulfil, the
obligations and liabilities of each Vendor (the "Assumed Liabilities") in
respect of the Contracts described in Schedules 1.1(t)(iii) and 1.1(ff)(iii),
the Licences described in Schedules 1.1(t)(iv) and 1.1(ff)(iv) and the
employment obligations in respect of the GalaxSea Transferred Employees and the
International Tours Transferred Employees. For greater certainty and without
limitation, Travelbyus-IT shall assume the Assumed Liabilities with respect to
the International Tours Business, with effect as of the Effective Date, as of
the Time of Closing on the Closing Date and Travelbyus-GalaxSea shall assume the
Assumed Liabilities with respect to the GalaxSea Business, with effect as of the
Effective Date, as of the Escrow Release Date.
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<PAGE>
4.2 Non-Assumption of Excluded Liabilities
For greater certainty and without limitation, the Purchaser shall only be liable
for the Assumed Liabilities and the Purchaser is not assuming and shall not be
liable or responsible for any other debt, liability or obligation of the Vendors
incurred in connection with the Purchased Business or any other business (the
"Excluded Liabilities").
ARTICLE 5 - CLOSING DATE AND TRANSFER OF POSSESSION
5.1 Closing Date and Place of Closing
Closing shall occur on the Closing Date at the offices of Cassels Brock &
Blackwell, Suite 2100, 40 King Street West, Toronto, Ontario, M5H 3C2 or at such
other place as the Parties may agree upon as the place of Closing.
5.2 Transfer and Delivery of Purchased Assets
Subject to compliance with the terms and conditions hereof: (i) the transfer of
possession of the GalaxSea Assets shall be deemed to take effect as of the
Effective Date, commencing at midnight on the Escrow Release Date; and (ii) the
transfer of possession of the International Tours Assets shall be deemed to take
effect as of midnight on the Closing Date as of the Effective Date.
5.3 Further Assurances
From time to time subsequent to Closing and both before and after the Escrow
Release Date, each of the Vendors and NAGE shall at all times, promptly execute
and deliver all such documents, including without limitation, all such
additional conveyances, transfers, consents and other assurances and shall do
all such other acts and things as the Purchaser and Travelbyus, acting
reasonably, may from time to time request be executed or done in order to better
evidence, perfect or effectuate any provision of this Agreement or of any
agreement or other document executed pursuant to this Agreement or any of the
respective obligations intended to be created hereby or thereby.
ARTICLE 6 - REPRESENTATIONS AND WARRANTIES
6.1 Representations and Warranties relating to the International Tours Business
and International Tours
International Tours represents and warrants to Travelbyus-IT and Travelbyus as
follows, and acknowledges that Travelbyus-IT and Travelbyus are relying on such
representations and warranties in connection with the purchase of the
International Tours Assets:
Organization. International Tours is a corporation duly incorporated and
organized
20
<PAGE>
and validly existing under the laws of the State of Oklahoma and has
the corporate power to own or lease the International Tours' Assets,
to carry on the International Tours Business and to enter into this
Agreement and to perform its obligations hereunder. International
Tours is duly qualified as a corporation to do business in each
jurisdiction in which the nature of the International Tours Business
or the International Tours Assets makes such qualification necessary
and as set out in Schedule 6.1(a), except where the failure to be so
qualified would not have a material adverse effect on the
International Tours Business or the International Tours Assets.
Authorization. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereunder have been duly
authorized by all necessary corporate action on the part of
International Tours. This Agreement has been duly authorized,
executed and delivered by International Tours and is a legal, valid
and binding obligation of International Tours, enforceable against
International Tours in accordance with its terms, except as
enforcement may be limited by bankruptcy, insolvency and other laws
affecting the rights of creditors generally and except that equitable
remedies may be granted only in the discretion of a court of competent
jurisdiction.
No Other Agreements to Purchase. No person other than Travelbyus-IT or
Travelbyus has any written or oral agreement or option or any right or
privilege (whether by law, pre-emptive or contractual) capable of
becoming an agreement or option for the purchase or acquisition from
International Tours of any of the International Tours Assets.
No Violation. The execution and delivery of this Agreement by
International Tours and the consummation of the transactions herein
provided for will not result in:
(i) the breach or violation of any of the provisions of, or
constitute a default under, or conflict with or cause the
acceleration of any obligation of International Tours under:
(A) any Contract to which International Tours is a party or by
which International Tours is or its properties or assets
are bound, following receipt of the consents to assignment
contemplated hereby in Schedule 6.1(d)(i)(A);
(B) any provision of the Articles of Incorporation (and any
amendments thereto) or by-laws or resolutions of the board
of directors (or any committee thereof) or shareholders of
International Tours;
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<PAGE>
(C) any judgment, decree, order or award of any court,
governmental body or arbitration body having jurisdiction
over International Tours;
(D) any Licence or authorization held by International Tours or
necessary for the operation of the International Tours
Business; or
(E) any applicable law, statute, ordinance, regulation or rule
applicable to International Tours, the International Tours
Business or any of the International Tours Assets; or
(ii) the creation or imposition of any Encumbrance against the
International Tours Business or any of the International Tours Assets.
Except as set forth on Schedule 12 or 13, International Tours has no
reason to believe that consents to the assignment of the Contracts
which are to be procured post-Closing, as identified on Schedule
6.1(d)(i)(A) will not be duly received, but makes no guarantees or
assurances in this regard.
(e) Acts of Bankruptcy. International Tours is not insolvent, has not
proposed a compromise or arrangement to its creditors generally, has
not taken any proceeding with respect to a compromise or arrangement,
has not taken any proceeding to have itself declared bankrupt or
wound-up, has not taken any proceeding to have a receiver appointed of
any part of its assets and at present, no encumbrancer or receiver has
taken possession of any of its property and no execution or distress
is enforceable or levied upon any of its property and no petition for
a receiving order in bankruptcy is filed against it.
(f) Sufficiency of International Tours Assets. The International Tours
Assets are sufficient to carry on the International Tours Business.
Any equipment, computers and other tangible assets comprising the
International Tours Assets are in good operating condition and are in
a state of good repair and maintenance. All tangible assets of the
International Tours Business are situated at the locations set out in
Schedule 6.1(f).
(g) Title to Personal Property. The International Tours Assets are
owned beneficially and, where appropriate, of record by International
Tours with good and marketable title thereto, free and clear of all
Encumbrances. No person has any written or oral agreement, option,
understanding or commitment or any right or privilege capable of
becoming an agreement, for the purchase from International Tours of
any of the International Tours Assets and there has been no
assignment, subletting or granting of any licence (of occupation or
otherwise) of or in respect of any of the
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<PAGE>
International Tours Assets. International Tours does not own any real
property or any shares in the capital of IT Cruise.
(h) Leased Property. International Tours is not a party to any lease or
agreement to lease in respect of any real property, whether as lessor
or lessee, other than the right that has been granted by NAGE to
occupy a portion of the premises leased by NAGE and located at 13150
Coit Road, Suite 125, Dallas, Texas (the "Leased Premises").
International Tours has the right to occupy and use a portion of the
Leased Premises, subject to the rights of GalaxSea and IT Cruise to
occupy a portion of the Leased Premises and the right of NAGE to
occupy the remainder of the Leased Premises.
(i) Intellectual Property. Schedule 1.1(ff)(v) sets out all registered or
pending or unregistered Intellectual Property (including particulars
of registration or application for registration) and all licences,
registered user agreements and other Contracts that comprise or relate
to the Intellectual Property of International Tours. The Intellectual
Property of International Tours comprises all registered and
unregistered, trade or brand names, business names, trade marks,
service marks, copyrights, patents, trade secrets, know-how,
inventions, designs and other industrial or intellectual property
necessary to conduct the International Tours Business. International
Tours is the beneficial and, where applicable, the registered owner of
its Intellectual Property, free and clear of all Encumbrances, and is
not a party to or bound by any Contract or any other obligation
whatsoever that limits or impairs its ability to sell, transfer,
assign or convey, or that otherwise affects, its Intellectual
Property. Save as provided for in Schedule 1.1(ff)(v), no person has
been granted any interest in or right to use all or any portion of the
Intellectual Property. The conduct of the International Tours
Business does not infringe upon the industrial or intellectual
property rights, domestic or foreign, of any other person, nor has
International Tours received any notice that the conduct of the
International Tours Business, including the use of its Intellectual
Property, infringes upon or breaches any industrial or intellectual
property rights of any other person, and International Tours, after
due inquiry, has no knowledge of any infringement or violation of any
of its rights in its Intellectual Property. International Tours is
not aware of any state of facts that casts doubt on the validity of
enforceability of any of its Intellectual Property. International
Tours has provided to Travelbyus-IT and Travelbyus a true and complete
copy of all agreements, instruments and amendments thereto that
comprise or relate to its Intellectual Property.
(j) Insurance. International Tours has the International Tours Assets and
the International Tours Business insured against loss or damage on a
replacement cost basis and such insurance coverage will be continued
in full force and effect to and including the Closing Date.
International Tours is not
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<PAGE>
in default with respect to any of the provisions contained in any such
insurance policy and has not failed to give any notice or to present
any claim under such insurance policy, in a due and timely fashion.
(k) Agreements and Commitments. Except as described in Schedule
1.1(ff)(iii), International Tours is not a party to or bound by any
Contract relating to the International Tours Business or the
International Tours Assets. There is no oral agreement or Contract
relating to the International Tours Business or the International
Tours Assets which is material to the International Tours Business
which has not been disclosed in writing to Travelbyus-IT and
Travelbyus. International Tours has performed all of the obligations
required to be performed by it and is entitled to all benefits under,
and is not in default or alleged to be in default in respect of, any
Contract relating to the International Tours Business or the
International Tours Assets to which it is a party or by which it is
bound; all such Contracts are in good standing and in full force and
effect, and no event, condition or occurrence exists that, after
notice or lapse of time or both, would constitute a default under any
of the foregoing, except as set forth on Schedule 1.1(ff)(iii).
International Tours has made available to Travelbyus-IT and Travelbyus
a true and complete copy of each Contract listed or described in
Schedule 1.1(ff)(iii) and all amendments, variations, extensions and
modifications thereto. There is no requirement under any Contract
relating to the International Tours Business or the International
Tours Assets to which International Tours is a party or by which it is
bound and which constitute part of the International Tours Assets to
give any notice to, or to obtain the consent or approval of, any party
to such Contract relating to the consummation of the transactions
contemplated by this Agreement, except for the notifications, consents
and approvals described in Schedule 6.1(d)(i)(A). Except as set forth
on Schedule 12 or Schedule 13, International Tours has no reason to
believe that any of the Contracts relating to the International Tours
Business or the International Tours Assets will not be renewed, in the
ordinary course of business, from and after their respective expiry
dates on similar terms and conditions, but makes no guarantees or
assurances in this regard.
(l) Compliance with Laws; Governmental Authorization. International Tours
has complied in all material respects with all laws, statutes,
ordinances, regulations, rules, judgments, decrees or orders
applicable to the International Tours Business and/or the
International Tours Assets, including without limitation, those
relating to anti-competition and anti-combines. Neither International
Tours nor any of its directors, officers, agents, employees or other
persons acting on behalf of International Tours have, directly or
indirectly, used any corporate funds for unlawful contributions,
gifts, entertainment or other unlawful expenses relating to political
activity,
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<PAGE>
made any unlawful payments on behalf of International Tours to foreign
or domestic government officials or employees or to foreign or
domestic political parties or campaigns from corporate funds or
knowingly made any false or fictitious entry on the books or records
of International Tours or made any bribe, rebate, pay-off, influence
payment, kickback or other unlawful payment on behalf of International
Tours. Schedule 1.1(ff)(iv) sets out a complete and accurate list of
all Licences held by or granted to International Tours and there are
no other Licences necessary to carry on the International Tours
Business or to own or lease any of the International Tours Assets.
Each Licence is valid, subsisting and in good standing and
International Tours is not in default or in breach of any Licence and,
to the knowledge of International Tours, no proceeding is pending or
threatened to revoke or limit any Licence. International Tours has
made available a true and complete copy of each Licence and all
amendments thereto to Travelbyus-IT and Travelbyus.
(m) Regulatory Consents and Approvals. There is no requirement to make
any filing with, give any notice to or to obtain any Licence, from any
governmental or regulatory agency or authority as a condition to the
lawful consummation of the transactions contemplated by this
Agreement, except for the filings, notifications, licences, permits,
certificates, registrations, consents and approvals that relate solely
to the identity of Travelbyus-IT or the nature of any business carried
on by Travelbyus-IT.
(n) Books and Records. The books and records of International Tours
fairly and correctly set out and disclose, in accordance with
generally accepted accounting principles, the financial position of
International Tours as at the date hereof and all material financial
transactions of International Tours relating to the International
Tours Business have been accurately recorded in such books and
records.
(o) Absence of Changes. Since June 30, 1999, the International Tours
Business has carried on only in the ordinary and normal course
consistent with past practice and there has not been; (i) any material
adverse change in the condition (financial or otherwise), assets,
liabilities, operations, earnings, business or prospects of the
International Tours Business; (ii) any damage, destruction or loss
(whether or not covered by insurance) affecting the International
Tours Assets; or (iii) any obligation or liability (whether absolute,
accrued, contingent or otherwise, and whether due or to become due)
incurred by International Tours in connection with the International
Tours Business, other than those incurred in the ordinary and normal
course of the International Tours Business and consistent with past
practice.
(p) Non-Arm's Length Transactions. With respect to the International
Tours
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Business:
(i) Since June 30, 1999, International Tours has not made any
payment or loan to, or borrowed any moneys from and is not
otherwise indebted to, any officer, director, employee,
shareholder or any other person not dealing at arm's length
with International Tours or any Affiliate or Associate of any
of the foregoing, except as disclosed on the International
Tours Financial Statements attached as Schedule 6.1(p)(i) and
except for usual employee reimbursements and compensation paid
in the ordinary course of the International Tours Business; and
(ii) International Tours is not party to any Contract with any
officer, director, employee, shareholder or any other person
not dealing at arm's length with International Tours or any
Affiliate or Associate of any of the foregoing.
(iii) No officer, director, employee or shareholder of International
Tours or any other person not dealing at arm's length with
International Tours and no entity that is an Affiliate or
Associate of one or more of such individuals:
(a) owns, directly or indirectly, any interest in (except for
shares representing less than 1% of the outstanding
shares of any class or series of any publicly traded
company), or is an officer, director, employee or
consultant or, any person that is, or is engaged in
business as, a competitor of the International Tours
Business (other than IT Cruise and GalaxSea and other
than as set forth on Schedule 6.1(p)(iii)) or a lessor,
lessee, supplier, distributor, sales agent or customer of
the International Tours Business (other than IT Cruise
and GalaxSea);
(b) owns, directly or indirectly, in whole or in part, any
property that International Tours uses in the operation
of the International Tours Business (other than IT Cruise
and GalaxSea); or
(c) has any cause of action or other claim whatsoever
against, or owes any amount to, International Tours in
connection with the International Tours Business, except
for any liabilities reflected in the International Tours
Financial Statements and claims in the ordinary course of
business, consistent with past practice.
(d) The International Tours Financial Statements have been
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prepared in accordance with generally accepted accounting
principles (except that the unaudited financial
statements do not have footnotes and are subject to year
end audit adjustment) applied on a basis consistent with
that of the preceding period and present fairly:
1. all of the assets, liabilities and financial
position of International Tours as at the dates
indicated; and
2. the sales, earnings, results of operation and
changes in financial position of International
Tours for all of the dates indicated.
(q) Taxes. International Tours has duly filed on a timely basis all tax
returns required to be filed by it and has paid all Taxes that are due
and payable, and all assessments, reassessments, governmental charges,
penalties, interest and fines due and payable by it, except for those
Taxes International Tours may be contesting in good faith.
International Tours has made adequate provision for Taxes payable in
respect of the International Tours Business for the current period and
any previous period for which Tax returns are not yet required to be
filed. There are no actions, suits, proceedings, investigations or
claims pending or, to the knowledge of International Tours, threatened
against International Tours in respect of Taxes, nor are any material
matters under discussion with any Governmental Authority with regard
to Taxes asserted by any such authority. International Tours has
withheld from each payment made to any of its past or present
employees, officers or directors, and to any non-residents of the
United States, the amount of all Taxes and other deductions required
to be withheld therefrom, and has paid the same to the proper tax or
other receiving officers within the time required under applicable
legislation.
(r) Litigation. Except as described in Schedule 6.1(r), there are no
actions, claims, suits or proceedings (whether or not purportedly on
behalf of International Tours) pending or, to the knowledge of
International Tours, threatened against or affecting International
Tours at law or in equity or before or by any federal, state,
municipal or other governmental department, court, commission, board,
bureau, agency or instrumentality, domestic or foreign, or before or
by an arbitrator or arbitration board, the resolution of which is
expected to have a material adverse effect on the International Tours
Business. International Tours is not aware of any grounds on which
any such action, suit or proceeding might be commenced with any
reasonable likelihood of success.
(s) Customers. Schedule 6.1(s) sets out all of the revenue generating
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customers of the International Tours Business and the basis upon which
they are a customer (i.e. franchise agreement, agency agreement,
informal agreement, etc.). There has been no termination or
cancellation of, and no material modification or change thereto except
as described on Schedule 6.1(s). International Tours is not currently
aware and has no reason to believe that the benefits of any
relationship with a material number of the customers of the
International Tours Business will not continue after Closing in
substantially the same manner as prior to the date of this Agreement.
(t) Suppliers. Schedule 6.1(t) sets out all the suppliers of the
International Tours Business (those suppliers of the International
Tours Business that account for more than 5% of revenue for calendar
1998 are marked with an "m") and, except as described on Schedule
6.1(t), there has been no termination or cancellation of, and no
material modification or change in, International Tours' relationship
with any of the material suppliers. International Tours is not
currently aware and has no reason to believe that the benefits of any
relationship with a material number of the suppliers of the
International Tours Business will not continue after Closing in the
same manner as prior to the date of this Agreement. Notwithstanding
the foregoing, Travelbyus-IT acknowledges that supplier contracts are
negotiated annually at the end of each calendar year for the next
following year.
(u) Employee Plans. There are no Employee Plans with respect to the
International Tours Business other than those listed in Schedule
6.1(u).
(v) Collective Agreements. Save and except as disclosed on Schedule
6.1(u), International Tours has not made any agreements with any
labour union or employee association nor made commitments to or
conducted negotiations with any labour union or employee association
with respect to any future agreements and International Tours is not
aware of any current attempts to organize or to establish any labour
union or employee association. There are no material controversies
pending or threatened between any labour union or employee
organization and International Tours. There are no pending or
threatened representation questions respecting the employees of
International Tours and there are no pending arbitration proceedings
arising out of or under any union contract.
(w) Year 2000 Readiness. To the knowledge of International Tours, the
software currently utilized by International Tours in connection with
the International Tours Business in its operation and the software
developed by or on behalf of International Tours in connection with
the International Tours Business and supplied to clients of
International Tours in connection with the International Tours
Business will function without error or interruption related
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to Date Data, specifically including errors or interruptions from
functions which may involve Date Data from more than one century. To
the knowledge of International Tours, the software currently utilized
by International Tours in connection with the International Tours
Business, in its operation and developed by or on behalf of
International Tours in connection with the International Tours
Business and or otherwise supplied to clients of International Tours
in connection with the International Tours Business does not contain
any routines or devices introduced by International Tours or to the
knowledge of International Tours introduced by any other person or in
any other manner that could interfere with their use (including
without limitation, time locks, keys or bombs) or interfere with,
delete or corrupt data (commonly known as "viruses").
(x) Full Disclosure. Neither this Agreement nor any document to be
delivered by International Tours nor any certificate, report,
statement or other document furnished by International Tours in
connection with the negotiation of this Agreement contains or will
contain any untrue statement of a material fact or omits or will omit
to state a material fact necessary to make the statements contained
herein or therein not misleading. There has been no event,
transaction or information that has come to the attention of
International Tours that has not been disclosed to Travelbyus-IT and
Travelbyus in writing and that could reasonably be expected to have a
material adverse effect on the assets, business, earnings, prospects,
properties or condition (financial or otherwise) of the International
Tours Business and/or the International Tours Assets.
6.2 Representations and Warranties relating to the Purchased Shares, IT Cruise
and NAGE
NAGE represents and warrants to Travelbyus-IT and Travelbyus as follows, and
acknowledges that Travelbyus-IT and Travelbyus are relying on such
representations and warranties in connection with its purchase of the Purchased
Shares and its purchase of the GalaxSea Assets including without limitation, the
GalaxSea West Shares:
(a) Organization. IT Cruise is a corporation duly incorporated and
organized and validly existing under the laws of the State of Oklahoma
and has the corporate power to own or lease its property and assets,
to carry on the IT Cruise Business. IT Cruise is duly qualified as a
corporation to do business in each jurisdiction in which the nature of
the IT Cruise Business or the IT Cruise Assets makes such
qualification necessary and as set out in Schedule 6.2(a), except
where the failure to be so qualified would not have a material adverse
effect on IT Cruise or the IT Cruise Business.
(b) Organization. NAGE is a corporation duly incorporated and validly
existing
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under the laws of the State of Delaware and has the corporate power to
own or lease its property, to carry on its business as now being
conducted by it, to enter into this Agreement and to perform its
obligations hereunder.
(c) Authorization. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereunder have been duly
authorized by all necessary corporate action on the part of NAGE save
and except as contemplated by the Clearance/Mailing Obligation. This
Agreement has been duly authorized, executed and delivered by NAGE and
is a legal, valid and binding obligation of NAGE, enforceable against
NAGE by Travelbyus-IT and Travelbyus in accordance with its terms,
except as enforcement may be limited by bankruptcy, insolvency and
other laws affecting the rights of creditors generally and except that
equitable remedies may be granted only in the discretion of a court of
competent jurisdiction.
(d) No Violation. The execution and delivery of this Agreement by NAGE
and the consummation of the transactions herein provided for will not
result in:
(i) the breach or violation of any of the provisions of, or
constitute a default under, or conflict with or cause the
acceleration of any obligation of NAGE or IT Cruise, as the
case may be, under:
(A) any Contract to which NAGE or IT Cruise is a party or by
which NAGE or IT Cruise or their respective properties or
assets are bound;
(B) any provision of the Articles of Incorporation or by-laws
or resolutions of the board of directors (or any
committee thereof) or shareholders of NAGE or IT Cruise,
subject to satisfaction of the Clearance/Mailing
Obligation;
(C) any judgment, decree, order or award of any court,
governmental body or arbitration body having jurisdiction
over NAGE or IT Cruise;
(D) any licence, permit, approval, consent or authorization
held by NAGE or IT Cruise or necessary to the operation
of their respective businesses; or
(E) any applicable law, statute, ordinance, regulation or
rule applicable to NAGE or IT Cruise, their respective
businesses or assets; or
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<PAGE>
(ii) the creation or imposition of any Encumbrance against the
business or the assets of NAGE, including for greater certainty
and without limitation, the Purchased Shares and/or the
business or the assets of IT Cruise including for greater
certainty and without limitation, the IT Cruise Assets and the
IT Cruise Business.
(e) Right to Sell. NAGE is the sole registered and beneficial owner of
the Purchased Shares with good and marketable title thereto free and
clear of all Encumbrances. NAGE has the exclusive right to sell,
transfer and assign the Purchased Shares to Travelbyus-IT as provided
in this Agreement subject to the Clearance/Mailing Obligation. The
Purchased Shares are not subject to the terms of any shareholders'
agreement, voting trust or voting agreement.
(f) No Other Agreements to Purchase. No person other than Travelbyus-IT
or Travelbyus has any written or oral agreement or option or any right
or privilege (whether by law, pre-emptive or contractual) capable of
becoming an agreement or option for the purchase or acquisition of the
Purchased Shares or any of the issued and outstanding shares in the
capital of IT Cruise.
(g) Acts of Bankruptcy. Neither NAGE nor IT Cruise is insolvent, has
proposed a compromise or arrangement to its creditors generally, has
taken any proceeding with respect to a compromise or arrangement, has
taken any proceeding to have itself declared bankrupt or wound-up, has
taken any proceeding to have a receiver appointed of any part of its
respective assets and at present, no encumbrancer or receiver has
taken possession of any of its respective property and no execution or
distress is enforceable or levied upon any of its respective property
and no petition for a receiving order in bankruptcy is filed against
it.
(h) Sufficiency of IT Cruise Assets. The IT Cruise Assets are sufficient
to carry on the IT Cruise Business. All equipment, computers and
other tangible assets comprising the IT Cruise Assets are in good
operating condition and are in a state of good repair and maintenance.
All tangible assets of the IT Cruise Business are situated at the
locations set out in Schedule 6.2(h).
(i) No Litigation. There are no outstanding claims at law or in equity or
before any Governmental Authority pending or to NAGE's knowledge,
proposed or threatened, which would prevent NAGE from completing the
transaction contemplated by this Agreement.
(j) Capitalization. The authorized capital and the issued capital of IT
Cruise
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are as set forth in Schedule 6.2(j). All of the outstanding shares in
the capital of IT Cruise have been duly and validly issued and are
outstanding as fully paid and non-assessable shares. No options,
warrants or other rights to purchase shares or other securities of IT
Cruise and no securities or obligations convertible into or
exchangeable for shares or other securities of IT Cruise have been
authorized or agreed to be issued or are outstanding.
(k) Title to Personal Property. The IT Cruise Assets are owned
beneficially and, where appropriate, of record by IT Cruise with good
and marketable title thereto, free and clear of all Encumbrances. No
person has any written or oral agreement, option, understanding or
commitment or any right or privilege capable of becoming an agreement
for the purchase from IT Cruise of any of the IT Cruise Assets and
there has been no assignment, subletting or granting of any licence
(of occupation or otherwise) of or in respect of any of the IT Cruise
Assets. IT Cruise does not own or lease any real property.
(l) Intellectual Property. Schedule 1.1(ll)(v) sets out all registered or
pending or unregistered Intellectual Property of IT Cruise (including
particulars or registration or application for registration) and all
licences, registered user agreements and other Contracts that comprise
or relate to the Intellectual Property of IT Cruise. The Intellectual
Property of IT Cruise comprises all registered and unregistered, trade
or brand names, business names, trade marks, service marks,
copyrights, patents, trade secrets, know-how, inventions, designs and
other industrial or intellectual property necessary to conduct the IT
Cruise Business. IT Cruise is the beneficial and, where applicable,
the registered owner of its Intellectual Property, free and clear of
all Encumbrances, and is not a party to or bound by any Contract or
any other obligation whatsoever that limits or impairs its ability to
sell, transfer, assign or convey, or that otherwise affects, its
Intellectual Property, save as provided for in Schedule 1.1(ll)(v).
No person has been granted any interest in or right to use all or any
portion of the Intellectual Property of IT Cruise. The conduct of the
IT Cruise Business does not infringe upon the industrial or
intellectual property rights, domestic or foreign, of any other
person. NAGE is not aware of a claim of any infringement or breach of
any industrial or intellectual property rights of any person, nor has
NAGE received any notice that the conduct of the IT Cruise Business,
including the use of its Intellectual Property, infringes upon or
breaches any industrial or intellectual property rights of any other
person, and NAGE, after due inquiry, has no knowledge of any
infringement or violation of any of the rights of IT Cruise in its
Intellectual Property. NAGE is not aware of any state of facts that
casts doubt on the validity or enforceability of any of the
Intellectual Property of IT Cruise. NAGE has provided to Travelbyus-IT
and Travelbyus a true and complete copy of all agreements, instruments
and amendments thereto that comprise or relate to the Intellectual
Property of IT Cruise.
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(m) Insurance. IT Cruise has the IT Cruise Assets and the IT Cruise
Business insured against loss or damage on a replacement cost basis
and such insurance coverage will be continued in full force and effect
to and including the Escrow Release Date. IT Cruise is not in default
with respect to any of the provisions contained in any such insurance
policy and has not failed to give any notice or to present any claim
under any such insurance policy, in a due and timely fashion.
(n) Agreements and Commitments. Except as described in Schedule
1.1(ll)(iii), IT Cruise is not a party to or bound by any Contract
relating to the IT Cruise Business or the IT Cruise Assets. There is
no oral agreement or Contract relating to the IT Cruise Business or
the IT Cruise Assets which is material to the IT Cruise Business which
has not been disclosed in writing to Travelbyus-IT and Travelbyus. IT
Cruise has performed all of the obligations required to be performed
by it and is entitled to all benefits under, and is not in default or
alleged to be in default in respect of, any Contract relating to the
IT Cruise Business or the IT Cruise Assets to which it is a party or
by which it is bound; all such Contracts are in good standing and in
full force and effect, and no event, condition or occurrence exists
that, after notice or lapse of time or both, would constitute a
default under any of the foregoing, except as set forth on Schedule
1.1(ll)(iii). NAGE has made available to Travelbyus-IT and Travelbyus
a true and complete copy of each Contract listed or described in
Schedule 1.1(ll)(iii) and all amendments, variations, extensions and
modifications thereto. There is no requirement under any Contract
relating to the IT Cruise Business or the IT Cruise Assets to which IT
Cruise is a party or by which it is bound and which constitute part of
the IT Cruise Assets to give any notice to, or to obtain the consent
or approval of, any party to such Contract relating to the
consummation of the transactions contemplated by this Agreement,
except for the notifications, consents and approvals described in
Schedule 6.2(n). Except as set forth on Schedule 12 or Schedule 13,
NAGE has no reason to believe that any of the Contracts relating to
the IT Cruise Business or the IT Cruise Assets will not be renewed in
the ordinary course of business from and after their respective expiry
dates on similar terms and conditions but makes no guarantees or
assurances in this regard.
(o) Compliance with Laws; Governmental Authorization. IT Cruise has
complied in all material respects with all laws, statutes, ordinances,
regulations, rules, judgments, decrees or orders applicable to the IT
Cruise Business and/or the IT Cruise Assets, including without
limitation, those relating to anti-combines or anti-competition.
Neither IT Cruise or NAGE nor any of their respective directors,
officers, agents, employees or other persons acting on behalf of IT
Cruise have, directly or indirectly, used any corporate funds for
unlawful contributions, gifts, entertainment or other
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unlawful expenses relating to political activity, made any unlawful
payments on behalf of IT Cruise to foreign or domestic government
officials or employees or to foreign or domestic political parties or
campaigns from corporate funds or knowingly made any false or
fictitious entry on the books or records of IT Cruise or made any
bribe, rebate, pay-off, influence payment, kickback or other unlawful
payment on behalf of IT Cruise. Schedule 1.1(ll)(iv) sets out a
complete and accurate list of all Licences held by or granted to IT
Cruise, and there are no other licences, permits, approvals, consents,
certificates, registrations or authorizations necessary to carry on
the IT Cruise Business or to own or lease any of the IT Cruise Assets.
Each Licence is valid, subsisting and in good standing and IT Cruise
is not in default or in breach of any Licence and, to the knowledge of
NAGE, no proceeding is pending or threatened to revoke or limit any
Licence. NAGE has made available a true and complete copy of each
Licence and all amendments thereto to Travelbyus-IT and Travelbyus.
(p) Regulatory Consents and Approvals. There is no requirement to make
any filing with, give any notice to or to obtain any Licence or
approval of, any Governmental Authority as a condition to the lawful
consummation of the transactions contemplated by this Agreement,
except for the filings, notifications, licences, permits, certificates
that relate solely to the identity of Travelbyus-IT or the nature of
any business carried on by Travelbyus-IT.
(q) Books and Records. The books and records of IT Cruise fairly and
correctly set out and disclose, in accordance with generally accepted
accounting principles, the financial position of IT Cruise as at the
date hereof and all material financial transactions of IT Cruise
relating to the IT Cruise Business have been accurately recorded in
such books and records.
(r) IT Cruise Financial Statements. The IT Cruise Financial Statements
attached as Schedule 6.2(r) have been prepared in accordance with
generally accepted accounting principles (except that the unaudited
financial statements do not have footnotes and are subject to year end
audit adjustment) and present fairly:
(i) all of the assets, liabilities and financial position of IT
Cruise as at the dates indicated; and
(ii) the sales, earnings, results of operation and changes in
financial position of IT Cruise for all of the dates indicated.
(s) No Joint Venture Interests, etc. IT Cruise is not a partner,
beneficiary, trustee, co-tenant, joint venturer or otherwise a
participant in any partnership, trust, joint venture, co-tenancy or
other similar jointly owned business
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undertaking and IT Cruise has no significant investment interests in
any business owned or controlled by any third person.
(t) Absence of Guarantees. IT Cruise has not given or agreed to give and
is not a party to or bound by any guarantee or indemnity in respect of
indebtedness or other obligations of any person or any other
commitment by which IT Cruise is, or is contingently, responsible for
such indebtedness or other obligations.
(u) Restrictive Covenants. IT Cruise is not a party to and is not bound
or affected by any commitment, agreement or document containing any
covenant expressly limiting the freedom of IT Cruise to compete in any
line of business anywhere in the world, transfer or move any of its
assets or operations or which materially or adversely affects the
business practices, operations or conditions of IT Cruise or the
continued operation of the IT Cruise Business after Closing on
substantially the same basis as the IT Cruise Business is presently
carried on.
(v) Tax Matters. IT Cruise has filed on a timely basis (within the time
and manner required by law) all federal and state income Tax returns
and election forms and the Tax returns of any other jurisdiction
required to be filed and all such returns and forms have been
completed accurately and correctly in all respects. As of the
Effective Date IT Cruise will have paid all Taxes (including for
greater certainty and without limitation, all federal, state and local
Taxes, assessments and reassessments or other imposts in respect of
income, business, assets or property) and all interest and penalties
thereon, for all previous years and all required quarterly instalments
due for the current fiscal year have been paid for which Tax returns
are not yet required to be filed. As of the Effective Date IT Cruise
will have provided adequate reserves for all Taxes for the periods
covered thereby, and such reserves are reflected in the IT Cruise
Financial Statements or in the books and records of IT Cruise. There
are no agreements, waivers or other arrangements providing for an
extension of time with respect to the filing of any Tax return by, or
payment of any Tax, governmental charge or deficiency by IT Cruise nor
are there any actions, suits, proceedings, investigations or claims
now threatened or pending against IT Cruise in respect of, or
discussions under way with any Governmental Authority relating to, any
such Tax or governmental charge or deficiency.
Except as set forth in Schedule 6.2(v), IT Cruise has not:
(i) acquired or had the use of any property from a person with whom
it was not dealing at arm's length other than at fair market
value;
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(ii) disposed of any property to a person with whom it was not
dealing at arm's length for proceeds less than the fair market
value thereof; or
(iii) discontinued carrying on any business in respect of which non-
capital losses were incurred, and any non-capital losses which
IT Cruise has are not losses from property or business
investment losses;
There are no contingent Tax liabilities nor any grounds which would
prompt a reassessment. The schedules attached to the corporate income
Tax returns by IT Cruise for each taxation year reflect and disclose
all transactions to which IT Cruise was a party as required by
applicable revenue laws and all of the transactions to which IT Cruise
was a party and required by applicable revenue laws to be included
therein are reflected or disclosed in such financial statements and
schedules and the corporate income Tax returns and schedules have been
duly and accurately completed as required by such Acts.
(w) Corporate Records and Minute Books. The corporate records and minute
books of IT Cruise have been delivered or made available to
Travelbyus-IT and Travelbyus. The articles and by-laws of IT Cruise
are in full force and effect and no amendments have been made to the
same. The minute books, including the articles and by-laws of IT
Cruise include complete and accurate minutes of all meetings of the
directors or shareholders of IT Cruise, as applicable, held to date or
resolutions passed by the directors or shareholders on consent, since
the date of incorporation of IT Cruise. The share certificate book,
register of shareholders, register of transfers and register of
directors of IT Cruise are complete and accurate.
(x) Bank Accounts, etc. Schedule 6.2(x) sets forth a complete list of
every financial institution in which IT Cruise maintains any
depository account, trust account or safety deposit box and the names
of all persons authorized to draw on or who have access to such
accounts or safety deposit box.
(y) Judgments and Executions and Insolvency Proceedings. There are no
judgments or executions against IT Cruise which are outstanding and
unsatisfied. IT Cruise has not made any assignment for the benefit of
creditors nor has any receiving order been made against IT Cruise
under the provisions of any applicable bankruptcy or insolvency
legislation nor has any petition for such an order been served upon IT
Cruise.
(z) Absence of Changes. Since June 30, 1999, the IT Cruise Business has
been carried on only in the ordinary and normal course consistent with
past practice and there has not been; (i) any material adverse change
in the condition (financial or otherwise), assets, liabilities,
operations, earnings,
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business or prospects of the IT Cruise Business; (ii) any damage,
destruction or loss (whether or not covered by insurance) affecting
the IT Cruise Assets; or (iii) any obligation or liability (whether
absolute, accrued, contingent or otherwise, and whether due or to
become due) incurred by IT Cruise in connection with the IT Cruise
Business, other than those incurred in the ordinary and normal
course of the IT Cruise Business and consistent with past practice.
(aa) Non-Arm's Length Transactions. With respect to the IT Cruise
Business:
(i) Since June 30, 1999, IT Cruise has not made any payment or
loan to, or borrowed any moneys from and is not otherwise
indebted to, any officer, director, employee, shareholder or
any other person not dealing at arm's length with IT Cruise
or any Affiliate or Associate of any of the foregoing, except
as disclosed on the IT Cruise Financial Statements and except
for usual employee reimbursements and compensation paid in
the ordinary course of the IT Cruise Business; and
(ii) IT Cruise is not party to any Contract with any officer,
director, employee, shareholder or any other person not
dealing at arm's length with IT Cruise or any Affiliate or
Associate of any of the foregoing.
(iii) No officer, director, employee or shareholder of IT Cruise or
any other person not dealing at arm's length with IT Cruise
and no entity that is an Affiliate or Associate of one or
more of such individuals:
(a) Owns, directly or indirectly, any interest in (except
for shares representing less than 1% of the
outstanding shares of any class or series of any
publicly traded company), or is an officer, director,
employee or consultant of, any person that is, or is
engaged in business as, a competitor of the IT Cruise
Business or a lessor, lessee, supplier, distributor,
sales agent or customer of the IT Cruise Business
(other than International Tours and GalaxSea and the
persons or entities set forth on Schedule
6.2(aa)(iii));
(b) Owns, directly or indirectly, in whole or in part, any
property that IT Cruise uses in the operation of the
IT Cruise Business (other than International Tours and
GalaxSea);
(c) Has any cause of action or other claim whatsoever
against, or owes any amount to, IT Cruise in
connection with the IT Cruise
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Business, except for any liabilities reflected in the
IT Cruise Financial Statements and claims in the
ordinary course of business, consistent with past
practice.
(ab) Litigation. Except as described in Schedule 6.1(r), there are no
actions, claims, suits or proceedings (whether or not purportedly on
behalf of IT Cruise) pending or, to the best knowledge of NAGE,
after due enquiry, threatened against or affecting IT Cruise at law
or in equity or before or by any federal, state, municipal or other
governmental department, court, commission, board, bureau, agency or
instrumentality, domestic or foreign, or before or by an arbitrator
or arbitration board the resolution of which is expected to have a
material adverse effect on the IT Cruise Business and/or the IT
Cruise Assets. NAGE is not aware of any ground on which any such
action, suit or proceeding might be commenced with any reasonable
likelihood of success.
(ac) Customers. Schedule 6.2(ac) sets out all of the revenue generating
customers of IT Cruise and the basis upon which they are a customer
(i.e. franchise agreement, agency agreement, informal arrangement,
etc.). There has been no termination or cancellation of, and no
material modification or change in IT Cruise's relationship with any
such customer or group of customers. NAGE is currently not aware and
has no reason to believe that the benefits of any relationship with
a material number of the customers of IT Cruise will not continue
after Closing in substantially the same manner as prior to the date
of this Agreement.
(ad) Suppliers. Schedule 6.2(ad) sets out all of the suppliers of IT
Cruise (those suppliers of IT Cruise accounting for more than 5% of
revenue for calendar 1998 are marked with an "m") and, except as
described in Schedule 6.2(d), there has been no termination or
cancellation of, and no material modification or change in, IT
Cruise's relationship with any of the material suppliers. NAGE is
not currently aware and has no reason to believe that the benefits
of any relationship with a material number of the suppliers of IT
Cruise will not continue after Closing in the same manner as prior
to the date of this Agreement. Notwithstanding the foregoing,
Travelbyus-IT acknowledges that supplier contracts are negotiated
annually as at the end of each calendar year for the following year.
(ae) Permits and Licenses. IT Cruise has all necessary Licenses and other
authorizations required to carry on and conduct the IT Cruise
Business and to own, lease or operate the IT Cruise Assets at the
places and in the manner in which the IT Cruise Business is
conducted. Schedule 1.1(ll)(iv) contains a full, complete and
accurate list of such Licenses and other authorizations.
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(af) Employee Plans. There are no Employee Plans in force.
(ag) Collective Agreements. IT Cruise has not made any agreements with
any labour union or employee association nor made commitments to or
conducted negotiations with any labour union or employee association
with respect to any future agreements and NAGE is not aware of any
current attempts to organize or to establish any labour union or
employee association. There are no material controversies pending or
threatened between any labour union or employee organization and IT
Cruise. There are no pending or threatened representation questions
respecting the employees of IT Cruise and there are no pending
arbitration proceedings arising out of or under any union contract.
(ah) Vacation Pay, etc. All vacation pay, bonuses, commissions and other
emoluments due or payable to any employees of IT Cruise are
reflected and have been accrued in the books of account of IT
Cruise.
(ai) Year 2000 Readiness. To the knowledge of NAGE the software currently
utilized by IT Cruise in its operation and the software developed by
or on behalf of IT Cruise and supplied to clients of IT Cruise will
function without error or interruption related to Date Data,
specifically including errors or interruptions from functions which
may involve Date Data from more than one century. To the knowledge
of NAGE, the software currently utilized by IT Cruise in its
operation and developed by or on behalf of IT Cruise and or
otherwise supplied to clients of IT Cruise does not contain any
routines or devices introduced by IT Cruise or to the knowledge of
NAGE introduced by any other person or in any other manner that
could interfere with their use (including without limitation, time
locks, keys or bombs) or interfere with, delete or corrupt data
(commonly known as "viruses").
(aj) Full Disclosure. Neither this Agreement nor any document to be
delivered by NAGE in connection with IT Cruise or the GalaxSea
Assets nor any certificate, report, statement or other document
furnished by NAGE with respect to IT Cruise or the GalaxSea Assets
in connection with the negotiation of this Agreement contains or
will contain any untrue statement of a material fact or omits or
will omit to state a material fact necessary to make the statements
contained herein or therein not misleading. There has been no event,
transaction or information that has come to the attention of NAGE
that has not been disclosed to Travelbyus-IT and Travelbyus in
writing and that could reasonably be expected to have a material
adverse effect on the assets, business, earnings, prospects,
properties or condition (financial or otherwise) of IT, the IT
Cruise Business, the IT Cruise Assets, the GalaxSea Assets or the
GalaxSea Business.
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6.3 Representations and Warranties relating to the GalaxSea Business and
GalaxSea Assets
GalaxSea and NAGE, jointly and severally, represent and warrant to Travelbyus-
GalaxSea and Travelbyus as follows, and acknowledge that Travelbyus-GalaxSea and
Travelbyus are relying on such representations and warranties in connection with
the purchase of the GalaxSea Assets including for greater certainty and without
limitation, the GalaxSea West Shares:
Organization. Each of GalaxSea and GalaxSea West is a corporation duly
incorporated and organized and validly existing under the laws of the
State of Oklahoma and the State of California, respectively, and has
the corporate power to own or lease its property and the GalaxSea
Assets, to carry on the GalaxSea Business as now being conducted by it
and, with respect to GalaxSea, to enter into this Agreement and to
perform its obligations hereunder. Each of GalaxSea and GalaxSea West
is duly qualified as a corporation to do business in each jurisdiction
in which the nature of the GalaxSea Business or the GalaxSea Assets
makes such qualification necessary and as set out in Schedule 6.3(a),
except where the failure to be so qualified would not have a material
adverse effect on the GalaxSea Business and/or the GalaxSea Assets.
Authorization. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereunder have been
authorized by all necessary corporate action on the part of GalaxSea
save and except for the Clearance/Mailing Obligation. This Agreement
has been duly authorized, executed and delivered by GalaxSea and is a
legal, valid and binding obligation of GalaxSea, enforceable against
GalaxSea by Travelbyus-GalaxSea and Travelbyus in accordance with its
terms, except as enforcement may be limited by bankruptcy, insolvency
and other laws affecting the rights of creditors generally and except
that equitable remedies may be granted only in the discretion of a
court of competent jurisdiction.
No Other Agreements to Purchase. No person other than Travelbyus-GalaxSea
or Travelbyus has any written or oral agreement or option or any right
or privilege (whether by law, pre-emptive or contractual) capable of
becoming an agreement or option for the purchase or acquisition from
GalaxSea of any of the GalaxSea Assets or from GalaxSea West of any of
the issued or unissued shares in the capital of GalaxSea West.
No Violation. The execution and delivery of this Agreement by GalaxSea and
the consummation of the transactions herein provided for will not
result in:
(i) The breach or violation or any of the provisions of, or
constitute a
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default under, or conflict with or cause the
acceleration of any obligation of GalaxSea or GalaxSea West
under:
(A) any Contract to which GalaxSea or GalaxSea West is a party
or by which GalaxSea or GalaxSea West is or their respective
properties or assets are bound, following receipt of the
consents to assignment contemplated hereby as set out in
Schedule 6.3(d)(i)(A);
(B) any provision of the Articles of Incorporation (and any
amendments thereto) or by-laws or resolutions of the board
of directors (or any committee thereof) or shareholders of
GalaxSea or GalaxSea West;
(C) any judgment, decree, order or award of any court,
governmental body or arbitration body having jurisdiction
over GalaxSea or GalaxSea West;
(D) any licence, permit, approval, consent or authorization held
by GalaxSea or GalaxSea West or necessary to the operation
of the GalaxSea Business; or
(E) any applicable law, statute, ordinance, regulation or rule
applicable to GalaxSea, GalaxSea West, the GalaxSea Business
or any of the GalaxSea Assets; or
(ii) the creation or imposition of any Encumbrance against the
GalaxSea Business or on any of the GalaxSea Assets, including
without limitation, the GalaxSea West Shares or the assets or
business of GalaxSea West.
Except as set forth on Schedule 6.3(r) or Schedule 14 GalaxSea has no
reason to believe that consents to the assignment of the Contracts
which are to be procured post-Closing as identified on Schedule
6.3(d)(i)(A) will not be duly received but makes no guarantees or
assurances in this regard.
(e) Sufficiency of GalaxSea Assets. The GalaxSea Assets are sufficient to
carry on the GalaxSea Business. All equipment, computers and other
tangible assets comprising the GalaxSea Assets are in good operating
condition and are in a state of good repair and maintenance. All
tangible assets of the GalaxSea Business are situated at the locations
set out in Schedule 6.3(e). GalaxSea is the sole registered and
beneficial owner of the GalaxSea West Shares with good and marketable
title thereto, free and clear of all Encumbrances. GalaxSea has the
exclusive right to sell, transfer and
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assign the GalaxSea West Shares to Travelbyus-GalaxSea as provided in
this Agreement subject to the Clearance/Mailing Obligation. The
GalaxSea West Shares are not subject to the terms of any shareholders'
agreement, voting trust or voting agreement. No person other than
Travelbyus-GalaxSea or Travelbyus has any written or oral agreement or
option or any right or privilege (whether by law, pre-emptive or
contractual) capable of becoming an agreement or option for the
purchase or acquisition of the GalaxSea West Shares or any of the
issued and outstanding shares in the capital of GalaxSea West.
(f) Acts of Bankruptcy. Neither GalaxSea nor GalaxSea West is insolvent,
has proposed a compromise or arrangement to its respective creditors
generally, has taken any proceeding with respect to a compromise or
arrangement, has taken any proceeding to have itself declared bankrupt
or wound-up, has taken any proceeding to have a receiver appointed of
any part of its respective assets and at present, no encumbrancer or
receiver has taken possession of any of its respective property and no
execution or distress is enforceable or levied upon any of its
respective property and no petition for a receiving order in
bankruptcy is filed against it.
(g) Title to Personal Property. The GalaxSea Assets are owned
beneficially and, where appropriate, of record by GalaxSea or GalaxSea
West with good and marketable title thereto, free and clear of all
Encumbrances.
(h) Intellectual Property. Schedule 1.1(t)(v) sets out all registered or
pending or unregistered Intellectual Property of GalaxSea and GalaxSea
West (including particulars of registration or application for
registration) and all licences, registered user agreements and other
Contracts that comprise or relate to the Intellectual Property of
GalaxSea and GalaxSea West. The Intellectual Property of GalaxSea and
GalaxSea West comprises all registered and unregistered, trade or
brand names, business names, trade marks, service marks, copyrights,
patents, trade secrets, know-how, inventions, designs and other
industrial or intellectual property necessary to conduct the GalaxSea
Business. GalaxSea and/or GalaxSea West is the beneficial and, where
applicable, the registered owner of the Intellectual Property of
GalaxSea and GalaxSea West, free and clear of all Encumbrances, and is
not a party to or bound by any Contract or any other obligation
whatsoever that limits or impairs its ability to sell, transfer,
assign or convey, or that otherwise affects, the Intellectual Property
of GalaxSea and GalaxSea West. No person has been granted any
interest in or right to use all or any portion of the Intellectual
Property of GalaxSea or GalaxSea West. The conduct of the GalaxSea
Business does not infringe upon the industrial or intellectual
property rights, domestic or foreign, of any other
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person. GalaxSea is not aware of a claim of any infringement or breach
of any industrial or intellectual property rights of any other person,
nor has GalaxSea received any notice that the conduct of the GalaxSea
Business, including the use of the Intellectual Property of GalaxSea
or GalaxSea West, infringes upon or breaches any industrial or
intellectual property rights of any other person, and GalaxSea, after
due inquiry, has no knowledge of any infringement or violation of any
rights in the Intellectual Property of GalaxSea or GalaxSea West.
GalaxSea is not aware of any state of facts that casts doubt on the
validity or enforceability of any of the Intellectual Property of
GalaxSea or GalaxSea West. GalaxSea has provided to Travelbyus-
GalaxSea and Travelbyus a true and complete copy of all agreements,
instruments and amendments thereto that comprise or relate to the
Intellectual Property of GalaxSea and GalaxSea West.
(i) Insurance. GalaxSea and GalaxSea West have the GalaxSea Assets and the
GalaxSea Business insured against loss or damage by all insurable
hazards or risks on a replacement cost basis and such insurance
coverage will be continued in full force and effect to and including
the Escrow Release Date. Neither GalaxSea nor GalaxSea West is in
default with respect to any of the provisions contained in any such
insurance policy and has not failed to give any notice or to present
any claim under any such insurance policy, in a due and timely
fashion.
(j) Agreements and Commitments. Except as described in Schedule
1.1(t)(iii), neither GalaxSea nor GalaxSea West is a party to or bound
by any Contract relating to the GalaxSea Business or the GalaxSea
Assets. There is no oral agreement or Contract relating to the
GalaxSea Business or the GalaxSea Assets which is material to the
GalaxSea Business which has not been disclosed in writing to
Travelbyus-GalaxSea and Travelbyus. GalaxSea and GalaxSea West have
performed all of the obligations required to be performed by them and
are entitled to all benefits under, and are not in default or alleged
to be in default in respect of, any Contract relating to the GalaxSea
Business or the GalaxSea Assets to which they are a party or by which
they are bound; all such Contracts are in good standing and in full
force and effect, and no event, condition or occurrence exists that,
after notice or lapse of time or both, would constitute a default
under any of the foregoing, except as set forth on Schedule
1.1(t)(iii). GalaxSea has made available to Travelbyus-GalaxSea and
Travelbyus a true and complete copy of each Contract listed or
described in Schedule 1.1(t)(iii) and all amendments, variations,
extensions and modifications thereto. There is no requirement under
any Contract relating to the GalaxSea Business or the GalaxSea Assets
to which GalaxSea or GalaxSea West is a party or by which they are
bound and which constitute part of the GalaxSea Assets to give any
notice to, or to obtain the consent or approval of, any party to such
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Contract relating to the consummation of the transactions contemplated
by this Agreement, except for the notifications, consents and
approvals described in Schedule 6.3(d)(i)(A). Except as set forth on
Schedule 6.3(r) or Schedule 14, GalaxSea has no reason to believe that
any of the Contracts relating to the GalaxSea Business or the GalaxSea
Assets will not be renewed in the ordinary course of business from and
after their respective expiry dates on similar terms and conditions
but makes no guarantees or assurances in this regard.
(k) Compliance with Laws: Governmental Authorization. Each of GalaxSea
and GalaxSea West has complied in all material respects with all laws,
statutes, ordinances, regulations, rules, judgments, decrees or orders
applicable to the GalaxSea Business and/or the GalaxSea Assets,
including without limitation, those relating to anti-combines or anti-
competition. Neither GalaxSea nor GalaxSea West nor any of their
respective directors, officers, agents, employees or other persons
acting on behalf of GalaxSea or GalaxSea West have, directly or
indirectly, used any corporate funds for unlawful contributions,
gifts, entertainment or other unlawful expenses relating to political
activity, made any unlawful payments on behalf of GalaxSea or GalaxSea
West to foreign or domestic government officials or employees or to
foreign or domestic political parties or campaigns from corporate
funds or knowingly made any false or fictitious entry on the books or
records of GalaxSea or GalaxSea West or made any bribe, rebate, pay-
off, influence payment, kickback or other unlawful payment on behalf
of GalaxSea or GalaxSea West. Schedule 1.1(t)(iv) sets out a complete
and accurate list of all Licences held by or granted to GalaxSea and
GalaxSea West and there are no other Licences necessary to carry on
the GalaxSea Business or to own or lease any of the GalaxSea Assets.
Each Licence is valid, subsisting and in good standing and neither
GalaxSea nor GalaxSea West is in default or breach of any Licence and,
to the knowledge of GalaxSea, no proceeding is pending or threatened
to revoke or limit any Licence. GalaxSea has made available a true
and complete copy of each Licence and all amendments thereto to
Travelbyus-GalaxSea and Travelbyus. For greater certainty and without
limitation, notwithstanding the disclosure set forth in Schedule
6.3(k), to the knowledge of GalaxSea, neither GalaxSea nor GalaxSea
West is in default of any franchise legislation as GalaxSea and
GalaxSea West have discontinued selling franchise and as applicable
legislation with respect to the filing of Uniform Franchise Offering
Circulars only applies to entities that actively sell and/or market
franchises and therefore at the present time, neither GalaxSea nor
GalaxSea West must be registered in any state under applicable
franchise legislation in order to conduct the GalaxSea Business. The
notation that GalaxSea "must also obtain approvals from certain of the
fifteen states prior to selling
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its Marketing Associates Program in order to confirm the program no
longer constitutes a franchise" should in no way be taken to mean that
GalaxSea and/or GalaxSea West can not carry on the GalaxSea Business
as currently conducted.
(l) Regulatory Consents and Approvals. There is no requirement to make
any filing with, give any notice to or to obtain any licence, permit,
certificate, registration, authorization, consent or approval of, any
governmental or regulatory agency or authority as a condition to the
lawful consummation of the transactions contemplated by this
Agreement, except for the filings, notifications, licences, permits,
certificates, registrations, consents and approvals that relate solely
to the identity of Travelbyus-GalaxSea or the nature of any business
carried on by Travelbyus-GalaxSea.
(m) Books and Records. The books and records of GalaxSea and GalaxSea
West fairly and correctly set out and disclose, in accordance with
generally accepted accounting principles, the financial position of
GalaxSea and GalaxSea West as at the date hereof, and all material
financial transactions of GalaxSea and GalaxSea West relating to the
GalaxSea Business have been accurately recorded in such books and
records.
(n) Absence of Changes. Since June 30, 1999, the GalaxSea Business has
been carried on only in the ordinary and normal course consistent with
past practice and there has not been; (i) any material adverse change
in the condition (financial or otherwise), assets, liabilities,
operations, earnings, business or prospects of the GalaxSea Business;
(ii) any damage, destruction or loss (whether or not covered by
insurance affecting the GalaxSea Assets; or (iii) any obligation or
liability (whether absolute, accrued, contingent other otherwise, and
whether due or to become due) incurred by GalaxSea of GalaxSea West in
connection with the GalaxSea Business, other than those incurred in
the ordinary and normal course of the GalaxSea Business and consistent
with past practice.
(o) Non-Arm's Length Transactions. With respect to the GalaxSea Business:
(i) Since June 30, 1999, neither GalaxSea nor GalaxSea West has made
any payment or loan to, or borrowed any moneys from and is not
otherwise indebted to any officer, director, employee,
shareholder or any other person not dealing at arm's length with
GalaxSea or GalaxSea West or any Affiliate or Associate of any of
the foregoing, except as disclosed on the GalaxSea Financial
Statements attached as Schedule 6.3(o)(i) and except for usual
employee reimbursements and compensation paid in the ordinary
course of the GalaxSea Business; and
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(ii) Neither GalaxSea nor GalaxSea West is a party to any Contract
with any officer, director, employee, shareholder or any other
person not dealing at arm's length with GalaxSea or GalaxSea
West or any Affiliate or Associate of any of the foregoing.
(iii) No officer, director, employee or shareholder of GalaxSea or
GalaxSea West or any other person not dealing at arm's length
with GalaxSea or GalaxSea West and no entity that is an
Affiliate or Associate or one or more of such individuals:
(a) owns, directly or indirectly, any interest in (except
for shares representing less than 1% of the outstanding
shares of any class or series of any publicly traded
company), or is an officer, director, employee or
consultant of, any person that is, or is engaged in
business as, a competitor of the GalaxSea Business or a
lessor, lessee, supplier, distributor, sales agent or
customer of the GalaxSea Business (other than
International Tours, IT Cruise and the persons or
entities set forth on Schedule 6.3(o)(iii));
(b) owns, directly or indirectly, in whole or in part, any
property that GalaxSea or GalaxSea West uses in the
operation of the GalaxSea Business (other than
International Tours or IT Cruise); or
(c) has any cause of action or other claim whatsoever
against, or owes any amount to, GalaxSea or GalaxSea
West in connection with the GalaxSea Business, except
for any liabilities reflected in the GalaxSea Financial
Statements and claims in the ordinary course of
business.
(d) The GalaxSea Financial Statements have been prepared in
accordance with generally accepted accounting principles
(except that the unaudited financial statements do not
have financial notes and are subject to year end audit
adjustment) applied on a basis consistent with that of
the preceding period and present fairly:
(i) all of the assets, liabilities and financial
position of GalaxSea and GalaxSea West as at the
dates indicated; and
(ii) the sales, earnings, results of operation and
changes in financial position of GalaxSea and
GalaxSea West for
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all of the dates indicated.
(p) Taxes. GalaxSea has duly filed on a timely basis all Tax returns
required to be filed by it and has paid all Taxes that are due and
payable, and all assessments, reassessments, governmental charges,
penalties, interest and fines due and payable by it, except for
those GalaxSea may be contesting in good faith. GalaxSea has made
adequate provision for Taxes payable in respect of the GalaxSea
Business for the current period and any previous period for which
Tax returns are not yet required to be filed. There are no actions,
suits, proceedings, investigations or claims pending or, to the
knowledge of GalaxSea, threatened against GalaxSea in respect of
Taxes nor are any material matters under discussion with any
Governmental Authority with regard to Taxes asserted by any such
authority. GalaxSea has withheld from each payment made to any of
its past or present employees, officers or directors, and to any
non-residents of the United States, the amount of all Taxes and
other deductions required to be withheld therefrom, and has paid the
same to the proper Tax or other receiving officers within the time
required under any applicable legislation.
(q) Litigation. Except as described in Schedule 6.1(r), there are no
actions, suits, claims or proceedings (whether or not purportedly on
behalf of GalaxSea or GalaxSea West) pending or, to the best
knowledge of GalaxSea, after due enquiry, threatened against or
affecting GalaxSea or GalaxSea West at law or in equity or before or
by any federal, state, municipal or other governmental department,
court, commission, board, bureau, agency or instrumentality,
domestic or foreign, or before or by an arbitrator or arbitration
board the resolution of which is expected to have a material adverse
effect on the GalaxSea Business and/or the GalaxSea Assets. GalaxSea
is not aware of any ground on which any such action, suit or
proceeding might be commenced with any reasonable likelihood of
success.
(r) Customers. Schedule 6.3(r) sets out all of the revenue generating
customers of the GalaxSea Business and the basis upon which they are
a customer (i.e. franchise agreement, agency agreement, informal
arrangement, etc.). There has been no termination or cancellation
of, and no material modification or change in, GalaxSea's or
GalaxSea West's relationship with any such customer or group of
customers, except as described in Schedule 6.3(r). GalaxSea is not
currently aware and has no reason to believe that the benefits of
any relationship with a material number of customers of the GalaxSea
Business will not continue after Closing in substantially the same
manner as prior to the date of this Agreement.
(s) Suppliers. Schedule 6.3(s) sets out all of the material suppliers of
the
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GalaxSea Business (those suppliers of the GalaxSea Business
accounting for more than five percent of revenue for calendar 1998
are marked with an "m") and, except as described on Schedule 6.3(s),
there has been no termination or cancellation of, and no material
modification or change in, GalaxSea's or GalaxSea West's
relationship with the material suppliers. GalaxSea is not currently
aware and has no reason to believe that the benefits of any
relationship with a material number of the suppliers of the GalaxSea
Business will not continue after Closing in substantially the same
manner as prior to the date of this Agreement. Notwithstanding the
foregoing, Travelbyus-GalaxSea acknowledges that supplier contracts
are negotiated annually at the end of each calendar year for the
following year.
(t) Employee Plans. There are no Employee Plans with respect to the
GalaxSea Business other than those listed in Schedule 6.3(t).
GalaxSea West has no employees.
(u) Collective Agreements. Save and except as disclosed on Schedule
6.3(t), neither GalaxSea nor GalaxSea West has made any agreements
with any labour union or employee association nor made commitments
to or conducted negotiations with any labour union or employee
association with respect to any future agreements and GalaxSea is
not aware of any current attempts to organize or to establish any
labour union or employee association. There are no material
controversies pending or threatened between any labour union or
employee organization and GalaxSea or GalaxSea West. There are no
pending or threatened representation questions respecting the
employees of GalaxSea and there are no pending arbitration
proceedings arising out of or under any union contract.
(v) Year 2000 Readiness. To the knowledge of GalaxSea, the software
currently utilized by GalaxSea or GalaxSea West in connection with
the GalaxSea Business in its operation and the software developed by
or on behalf of GalaxSea or GalaxSea West in connection with the
GalaxSea Business and supplied to clients of GalaxSea or GalaxSea
West in connection with the GalaxSea Business: will function without
error or interruption related to Date Data, specifically including
errors or interruptions from functions which may involve Date Data
from more than one century. To the knowledge of GalaxSea, the
software currently utilized by GalaxSea and GalaxSea West in
connection with the GalaxSea Business, in its operation and
developed by or on behalf of GalaxSea or GalaxSea West in connection
with the GalaxSea Business and or otherwise supplied to clients of
GalaxSea or GalaxSea West in connection with the GalaxSea Business
does not contain any routines or devices introduced by GalaxSea or
GalaxSea West or to the knowledge of GalaxSea introduced by any
other person or in any other manner that could interfere with their
use (including without limitation,
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time locks, keys or bombs) or interfere with, delete or corrupt data
(commonly known as "viruses").
(w) Capitalization. The authorized capital and the issued capital of
GalaxSea West consists of 1,000 shares of authorized common stock,
of which 100 shares are issued and outstanding. All of the
outstanding shares in the capital of GalaxSea West have been duly
and validly issued and are outstanding as fully paid and non-
assessable shares. No options, warrants or other rights to purchase
shares or other securities of GalaxSea West and no securities or
obligations convertible into or exchangeable for shares or other
securities of GalaxSea West have been authorized or agreed to be
issued or are outstanding.
(x) No Joint Venture Interests, etc. GalaxSea West is not a partner,
beneficiary, trustee, co-tenant, joint venturer or otherwise a
participant in any partnership, trust, joint venture, co-tenancy or
other similar jointly owned business undertaking and GalaxSea West
has no significant investment interests in any business owned or
controlled by any third person.
(y) Absence of Guarantees. GalaxSea West has not given or agreed to give
and is not a party to or bound by any guarantee or indemnity in
respect of indebtedness or other obligations of any person or any
other commitment by which GalaxSea West is, or is contingently,
responsible for such indebtedness or other obligations.
(z) Restrictive Covenants. GalaxSea West is not a party to and is not
bound or affected by any commitment, agreement or document
containing any covenant expressly limiting the freedom of GalaxSea
West to compete in any line of business anywhere in the world,
transfer or move any of its assets or operations or which materially
or adversely affects the business practices, operations or
conditions of GalaxSea West or the continued operation of the
GalaxSea Business after Closing on substantially the same basis as
the GalaxSea Business is presently carried on.
(aa) Tax Matters. GalaxSea West has filed on a timely basis (within the
time and manner required by law) all federal and state income Tax
returns and election forms and the Tax returns of any other
jurisdiction required to be filed and all such returns and forms
have been completed accurately and correctly in all respects. As of
the Effective Date GalaxSea West will have paid all Taxes (including
for greater certainty and without limitation, all federal, state and
local Taxes, assessments and reassessments or other imposts in
respect of income, business, assets or property) and all interest
and penalties thereon, for all previous years and all required
quarterly
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instalments due for the current fiscal year have been paid for which
Tax returns are not yet required to be filed. As of the Effective
Date GalaxSea West will have provided adequate reserves for all
Taxes for the periods covered thereby, and such reserves are
reflected in the GalaxSea Financial Statements or in the books and
records of GalaxSea West. There are no agreements, waivers or other
arrangements providing for an extension of time with respect to the
filing of any Tax return by, or payment of any Tax, governmental
charge or deficiency by GalaxSea West nor are there any actions,
suits, proceedings, investigations or claims now threatened or
pending against GalaxSea West in respect of, or discussions under
way with any Governmental Authority relating to, any such Tax or
governmental charge or deficiency.
GalaxSea West has not:
(i) acquired or had the use of any property from a person with
whom it was not dealing at arm's length other than at fair
market value;
(ii) disposed of any property to a person with whom it was not
dealing at arm's length for proceeds less than the fair
market value thereof; or;
(iii) discontinued carrying on any business in respect of which
non-capital losses were incurred, and any non-capital losses
which GalaxSea West has are not losses from property or
business investment losses;
There are no contingent Tax liabilities nor any grounds which would
prompt a reassessment. The schedules attached to the corporate
income Tax returns by GalaxSea West for each taxation year reflect
and disclose all transactions to which GalaxSea West was a party as
required by applicable revenue laws and all of the transactions to
which GalaxSea West was a party and required by applicable revenue
laws to be included therein are reflected or disclosed in such
financial statements and schedules and the corporate income Tax
returns and schedules have been duly and accurately completed as
required by such Acts.
(bb) Corporate Records and Minute Books. The corporate records and minute
books of GalaxSea West have been delivered or made available to
Travelbyus-GalaxSea and Travelbyus. The articles and by-laws of
GalaxSea West are in full force and effect and no amendments have
been made to the same. The minute books, including the articles and
by-laws of GalaxSea West include complete and accurate minutes of
all meetings of the directors or shareholders of GalaxSea West, as
applicable, held to date or resolutions
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passed by the directors or shareholders on consent, since the date
of incorporation of GalaxSea West. The share certificate book,
register of shareholders, register of transfers and register of
directors of GalaxSea West are complete and accurate.
(cc) Bank Accounts, etc. Schedule 6.3(cc) sets forth a complete list of
every financial institution in which GalaxSea West maintains any
depository account, trust account or safety deposit box and the
names of all persons authorized to draw on or who have access to
such accounts or safety deposit box.
(dd) Judgments and Executions and Insolvency Proceedings. There are no
judgments or executions against GalaxSea West which are outstanding
and unsatisfied. GalaxSea West has not made any assignment for the
benefit of creditors nor has any receiving order been made against
GalaxSea West under the provisions of any applicable bankruptcy or
insolvency legislation nor has any petition for such an order been
served upon GalaxSea West.
(ee) Permits and Licenses. GalaxSea West has all necessary Licenses and
other authorizations required to carry on and conduct the GalaxSea
Business and to own, lease or operate its respective GalaxSea Assets
at the places and in the manner in which the GalaxSea Business is
conducted.
(ff) Full Disclosure. Neither this Agreement nor any document to be
delivered by GalaxSea nor any certificate, report, statement or
other document furnished by GalaxSea in connection with the
negotiation of this Agreement contains or will contain any untrue
statement of a material fact or omits or will omit to state a
material fact necessary to make the statements contained herein or
therein not misleading. There has been no event, transaction or
information that has come to the attention of GalaxSea and/or NAGE
that has not been disclosed to Travelbyus-GalaxSea and Travelbyus in
writing and that could reasonably be expected to have a material
adverse effect on the assets, business, earnings, prospects,
properties or condition (financial or otherwise) of the GalaxSea
Business and/or the GalaxSea Assets, including without limitation,
the GalaxSea West Shares or the assets, business, earnings,
prospects properties or condition (financial or otherwise) of
GalaxSea West.
ARTICLE 7 - REPRESENTATIONS AND WARRANTIES OF TRAVELBYUS AND THE PURCHASER
7.1 Representations and Warranties of Travelbyus and the Purchaser
Each of the Purchaser and Travelbyus, jointly and severally, represents and
warrants to
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the Vendors and NAGE as follows and acknowledges and confirms that the Vendors
and NAGE are relying on such representations and warranties in connection with
their sale of the Purchased Assets and the Purchased Business:
(a) Organization. Each of the Purchaser and Travelbyus is a corporation
duly incorporated and organized and validly existing under the laws
of its jurisdiction of incorporation and has the corporate power to
own or lease its property, to carry on its business as now being
conducted by it and to enter into this Agreement and to perform its
obligations hereunder. Each of the Purchaser and Travelbyus is duly
qualified as a corporation to do business in each jurisdiction in
which the nature of its business or the location of its assets make
such qualification necessary, except where the failure to be so
qualified would not have a material adverse effect on the Purchaser
or Travelbyus.
(b) Authorization. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereunder have been
duly authorized by all necessary corporate action on the part of
each of the Purchaser and Travelbyus. This Agreement has been duly
authorized, executed and delivered by the Purchaser and Travelbyus
and is a legal, valid and binding obligation of each of the
Purchaser and Travelbyus, enforceable against the Purchaser and
Travelbyus by the Vendors and NAGE in accordance with its terms,
except as such enforcement may be limited by bankruptcy, insolvency
and other laws affecting the rights of creditors generally and
except that equitable remedies may only be granted in the discretion
of a court of competent jurisdiction.
(c) No Violation. The execution and delivery of this Agreement by the
Purchaser and Travelbyus and the consummation of the transactions
herein provided for will not result in the violation of, or
constitute a default under, or conflict with or cause the
acceleration of any obligation of the Purchaser or Travelbyus, as
the case may be, under:
(i) any Contract to which the Purchaser or Travelbyus is a party
or by which the Purchaser or Travelbyus is bound;
(ii) any provision of the constating documents or by-laws or
resolutions of the board of directors (or any committee
thereof) or shareholders of either the Purchaser or
Travelbyus;
(iii) any judgment, decree, order or award of any court,
governmental body or arbitrator having jurisdiction over the
Purchaser or Travelbyus;
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(iv) any licence, permit, approval, consent or authorization held
by the Purchaser or Travelbyus or necessary to the operation
of their respective businesses; or
(v) any applicable law, statute, ordinance, regulation or rule
applicable to each of the Purchaser and Travelbyus.
(d) Authorized Capital. The authorized capital of Travelbyus consists of
an unlimited number of common shares without par value, of which as
at October 4, 1999 43,539,178 common shares have been duly issued
and are outstanding as fully paid and non-assessable as at the date
hereof together with options to officers, directors and employees to
purchase an aggregate of 2,675,000 common shares and warrants to
purchase an aggregate of 10,260,270 common shares at an exercise
price of CDN$0.68 expiring on September 9, 2001.
(e) Title to Property. Travelbyus is the owner, directly and/or
indirectly, and beneficially and of record, of its leased assets and
its owned assets, with good and marketable title thereto free and
clear of any and all Encumbrances subject to a trust indenture in
favour of Montreal Trust Company of Canada dated September 9, 1999
pursuant to which an aggregate of CDN$11,950,000 principal amount of
12.5% senior secured redeemable debentures were issued.
(f) Financial Statements. The Travelbyus Financial Statements attached
as Schedule 7.1(f) have been prepared in accordance with Canadian
generally accepted accounting principles applied on a basis
consistent with that of the preceding period and present fairly:
(i) all of the assets, liabilities and financial position of
Travelbyus as at the dates indicated; and
(ii) the sales, earnings, results of operation and changes in
financial position of Travelbyus for all of the dates
indicated.
(g) Shares. The issued and outstanding shares in the capital of
Travelbyus form part of a class of shares that are listed and posted
for trading on the TSE, the WSE and the Frankfurt stock exchange.
(h) Regulatory Approvals. No Governmental Authorization is required on
the part of Travelbyus and/or the Purchaser in connection with the
execution, delivery and performance of this Agreement or any other
agreements to be entered into under the terms of this Agreement.
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(i) Reporting Issuer Status. Travelbyus is a "reporting issuer" within
the meaning of the Securities Act (Alberta), (British Columbia),
(Manitoba), (Ontario) and (Quebec) and is not in default of any
requirement of applicable laws and no material change relating to
Travelbyus has occurred with respect to which the requisite material
change report has not been filed and no such disclosure has been
made on a confidential basis. No securities commission or similar
regulatory authority has issued any order preventing or suspending
trading in any securities of Travelbyus or prohibiting the issue and
sale of the common shares in the capital of Travelbyus and to the
knowledge of the Purchaser and Travelbyus no such proceedings for
such purposes are pending or threatened.
(j) Compliance with Laws; Governmental Authorization. Each of the
Purchaser and Travelbyus has complied in all material respects with
all laws, statutes, ordinances, regulations, rules, judgments,
decrees or orders applicable to each of the Purchaser and
Travelbyus.
(k) Litigation. There are no actions, claims, suits or proceedings
(whether or not purportedly on behalf of the Purchaser or
Travelbyus) pending or, to the best knowledge of the Purchaser and
Travelbyus, after due enquiry, threatened against or affecting the
Purchaser or Travelbyus at law or in equity or before or by any
federal, state, municipal or other governmental department, court,
commission, board, bureau, agency or instrumentality, domestic or
foreign, or before or by an arbitrator or arbitration board. The
Purchaser and Travelbyus are not aware of any ground on which any
such action, suit or proceeding might be commenced with any
reasonable likelihood of success.
(l) Full Disclosure. Neither this Agreement nor any document to be
delivered by the Purchaser or Travelbyus nor any certificate,
report, statement or other document furnished by the Purchaser or
Travelbyus in connection with the negotiation of this Agreement
contains or will contain any untrue statement of a material fact or
omits or will omit to state a material fact necessary to make the
statements contained herein or therein not misleading. There has
been no event, transaction or information that has come to the
attention of the Purchaser and/or Travelbyus that has not been
disclosed to the Vendors and/or NAGE in writing and that could
reasonably be expected to have a material adverse effect on the
assets, business, earnings, prospects, properties or condition
(financial or otherwise) of the Purchaser or Travelbyus.
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ARTICLE 8 - SURVIVAL OF COVENANTS, REPRESENTATIONS AND WARRANTIES
8.1 Survival of Representations and Warranties of the Vendors and NAGE
The representations and warranties of the Vendors and NAGE contained in this
Agreement and in all certificates and documents delivered pursuant to or
contemplated by this Agreement shall survive Closing and shall continue in full
force and effect for the benefit of the Purchaser and Travelbyus provided
however that no Claim in respect thereof shall be valid unless it is made within
the following time periods:
(a) in the case of any Claim in respect of a representation or warranty
relating to a matter other than a matter relating to title to the
Purchased Assets or the Purchased Shares, within a period of 18
months from Closing;
(b) in the case of any Claim in respect of a representation or warranty
relating to title of any of the Vendors or NAGE to the Purchased
Assets or the Purchased Shares and those matters set forth in
sections 11.1(c), (d), (e), (f), (g), (h), (i), (j) and (k) there
shall be no time limit within which such a Claim may be made; and
(c) in the case of any Claim in respect of any representation or
warranty including fraud or fraudulent misrepresentation subject
only to applicable limitations imposed by law;
and any such Claim as aforesaid shall be made in accordance with the provisions
set forth in Article 11, and upon the expiry of the relevant limitation period
referred to in clauses (a) and (c) above, the Vendors and NAGE shall have no
further liability to the Purchaser and Travelbyus with respect to the
representations and warranties referred to in such clauses, respectively, except
in respect of Claims which have theretofor been made in accordance with the
provisions set forth above. The survival of such representations and warranties
shall continue for the applicable limitation period notwithstanding any
investigation made by or on behalf of the Purchaser and/or Travelbyus.
8.2 Survival of Representations and Warranties of the Purchaser and Travelbyus
The representations and warranties of the Purchaser and Travelbyus contained in
this Agreement and in all certificates and documents delivered pursuant to or
contemplated by this Agreement shall survive Closing and shall continue in full
force and effect for the benefit of the Vendors and NAGE provided however that
no Claim in respect thereof shall be valid unless it is made within the
following time periods:
(a) in the case of any Claim in respect of a representation or warranty
relating to a matter other than (b) or (c) below, within a period of
18 months from
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Closing;
(b) in the case of any claim in respect of any representation or
warranty including fraud or fraudulent misrepresentation subject
only to applicable limitations imposed by law; and
(c) in the case of any Claim in respect of those matters set forth in
sections 11.2(c), (d) and (e), there shall be no time limit within
which such a Claim may be made;
and any such claim as aforesaid shall be made in accordance with the provisions
set forth in Article 11, and upon the expiry of the relevant limitation period
referred to in clause (a) and (b) above, the Purchaser and Travelbyus shall have
no further liability to the Vendors and NAGE with respect to the representations
and warranties referred to in such clauses, respectively, except in respect of
Claims which have theretofor been made in accordance with the provisions set
forth above. The survival of such representations and warranties shall continue
for the applicable limitation period notwithstanding any investigation made by
or on behalf of the Vendors and NAGE.
ARTICLE 9 - COVENANTS
9.1 Delivery of Books and Records
At the Time of Closing there shall be delivered to the Purchaser by the Vendors
and NAGE all books and records relating to the Purchased Business, the Purchased
Assets and the Purchased Shares provided that any and all books and records
relating to the GalaxSea Assets and the Purchased Shares shall be deposited in
escrow with the Escrow Agent pursuant to the Closing Escrow Agreement. The
Purchaser agrees that it will preserve the books and records delivered to it for
a period of three years from Closing or for such longer period as is required by
any applicable law and will permit the applicable Vendor and NAGE or their
authorized representatives reasonable access thereto in connection with the
affairs of such Vendor or NAGE relating to its matters, but the Purchaser shall
not be responsible or liable to the applicable Vendor or NAGE for or as a result
of any accidental loss or destruction of or damage to any such books or records.
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9.2 Change of Name
International Tours agrees to change its corporate name and the names of any of
its Associates or Affiliates except for those businesses set forth on Schedules
6.1(p)(iii) and 6.3(o)(iii) that include the words International Tours or any
derivative thereof to names that do not include such words or any part thereof
or any similar words, within 10 days after Closing. GalaxSea and NAGE jointly
and severally covenant and agree that GalaxSea shall change its corporate name
and the name of any Associates or Affiliates [except for those businesses set
forth on Schedules 6.1(p)(iii) and 6.3(o)(iii) that include the words GalaxSea
or any derivative thereof to names that do not include such words or any part
thereof or any similar words, within 10 days after the Escrow Release Date.
9.3 Expenses
All costs and expenses (including fees and disbursements of legal counsel and
accountants) incurred in connection with this Agreement and the transaction
contemplated thereby shall be borne by the Party incurring such expenses.
9.4 Transferred Employees
(a) Each Vendor and NAGE hereby agree and acknowledge that save and except
for the GalaxSea Transferred Employees and the International Tours
Transferred Employees all other employees (full-time and part-time)
and all other contractors who are, or have at some point in time, been
retained by such Vendor in respect of the Purchased Business shall be
the sole responsibility of such Vendor and such Vendor shall discharge
and pay any and all liabilities, debts and obligations with respect to
such employees and contractors, including without limitation, any
severance, termination notice or payment in lieu of notice.
(b) Travelbyus-IT agrees that effective as at the Effective Date but to
take effect as of the Time of Closing on the Closing Date it shall
offer employment to the International Tours Transferred Employees on
the terms and conditions as set out in Schedule 1.1(kk). Travelbyus-
IT shall only have obligation or liability with respect to the
International Tours Transferred Employees who accept such offer of
employment Travelbyus-GalaxSea agrees that effective as at the
Effective Date but to take effect as of the Escrow Release Date, it
shall offer employment to the GalaxSea Transferred Employees on the
terms and conditions set out in Schedule 1.1(x). Travelbyus-GalaxSea
shall only have obligation or liability with respect to the GalaxSea
Transferred Employees who accept such offer of employment.
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(c) The Vendors and NAGE covenant and agree not to solicit directly or
indirectly, the services of Ronald Blaylock during the two year period
following Closing or while Ronald Blaylock is employed by Travelbyus-
IT, its Associates or Affiliates whichever period is shorter, without
the prior written consent of Travelbyus-IT, which consent may be
unreasonably withheld.
9.5 Clearance/Mailing Obligation
NAGE, IT Cruise and GalaxSea shall do all such acts and things and shall use
their commercial efforts in good faith to fulfil the Clearance/Mailing
Obligation.
ARTICLE 10 - CONDITIONS OF CLOSING
10.1 Conditions of Closing in Favour of the Purchaser and Travelbyus
The purchase and sale of the Purchased Assets and the Purchased Shares is
subject to the following terms and conditions for the exclusive benefit of the
Purchaser and Travelbyus, to be performed or fulfilled at or prior to the Time
of Closing:
(a) Covenants. All of the terms, covenants and conditions of this
Agreement to be complied with or performed by the Vendors and NAGE at
or before the Time of Closing (save and except for the
Clearance/Mailing Obligation) shall have been complied with or
performed.
(b) Receipt of Closing Documents. All instruments of conveyance and other
documentation relating to the transfer, assignment and sale of the
Purchased Assets and the Purchased Shares including without
limitation, assignments of the Contracts and the Intellectual Property
(and consents thereto where required), bills of sale and documentation
relating to the authorization and completion of the purchase and sale
of the Purchased Assets and the Purchased Shares and the taking of all
actions and proceedings (corporate or otherwise) on or prior to
Closing in connection with the performance by each of the Vendors and
NAGE of their obligations under this Agreement shall be satisfactory
to the Purchaser and Travelbyus and their counsel, acting reasonably
and the Purchaser and Travelbyus shall have received copies of all
such other documentation or other evidence as the Purchaser and
Travelbyus may reasonably request in order to establish the
consummation of the transactions contemplated hereby by each of the
Vendors and NAGE of all corporate proceedings in connection herewith
and compliance with the terms, warranties and conditions hereof in
form and substance satisfactory to the Purchaser and Travelbyus and
their counsel acting reasonably provided that the only condition with
respect to the
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consummation of the sale of the Purchased Shares and the GalaxSea
Assets that shall remain outstanding shall be the Clearance/Mailing
Obligation.
(c) Regulatory Consents. These shall have been obtained from all
appropriate federal, state, municipal or other governmental or
administrative bodies such Licences and authorizations as are required
to be obtained by each of the Vendors to permit the completion of the
transaction as herein contemplated in form and substance satisfactory
to the Purchaser and Travelbyus, acting reasonably.
(d) Contractual Consents. Each of the Vendors and NAGE shall have given
or obtained the notices, consents and approvals described in Schedules
6.1(d)(i)(A), 10.1(d), and 6.2(n), in each case in form and substance
satisfactory to the Purchaser and Travelbyus, acting reasonably.
(e) Employment Agreement. Ronald Blaylock shall have executed an
employment agreement with Travelbyus-IT setting out the terms and
conditions of his employment, in form and substance satisfactory to
the Purchaser and Travelbyus acting reasonably.
(f) Escrow Agreements. Each of the Vendors, NAGE and GMP or the Escrow
Agent, as applicable shall have executed and delivered to the
Purchaser and Travelbyus the Closing Escrow Agreement and the
Representation and Warranty Escrow Agreement.
(g) No Action or Proceeding. No legal or regulatory action or proceeding
shall be pending or threatened by any person to enjoin, restrict or
prohibit the purchase and sale of the Purchased Assets and the
Purchased Shares contemplated hereby.
(h) Legal Opinion. Each of the Vendors and NAGE shall have delivered to
the Purchaser and Travelbyus a favourable opinion of counsel in form
and substance satisfactory to the Purchaser and Travelbyus and their
counsel, acting reasonably.
(i) Legal Matters. All actions, proceedings, instruments and documents
required to implement this Agreement, or instrumental thereto and NAGE
shall have been approved as to form and legality by counsel for the
Purchaser and Travelbyus, acting reasonably.
If any of the conditions precedent contained in this section 10.1 shall not
be performed or fulfilled at or prior to the Time of Closing to the
satisfaction of the Purchaser and Travelbyus, acting reasonably, the
Purchaser and Travelbyus may,
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by notice to the Vendors and NAGE, terminate this Agreement and the
obligations of the Vendors and NAGE as well as the Purchaser and Travelbyus
under this Agreement, other than the obligations with respect to the
payment of brokerage fees and commissions and the obligations contained in
section 12.3. Any such condition may be waived in whole or in part by the
Purchaser and Travelbyus without prejudice to any claims they may have for
breach of covenant, representation or warranty.
10.2 Conditions of Closing in Favour of the Vendors and NAGE
The sale and purchase of the Purchased Assets and the Purchased Shares of the
Vendors are subject to the following terms and conditions for the exclusive
benefit of the Vendors and NAGE, to be performed or fulfilled at or prior to the
Time of Closing:
(a) Covenants. All of the terms, covenants and conditions of this
Agreement to be complied with or performed by the Purchaser and
Travelbyus at or before the Time of Closing shall have been complied
with or performed.
(b) Receipt of Closing Documents. All instruments of conveyance and other
documentation relating to the transfer, assignment and sale of the
Purchased Assets and the Purchased Shares including without
limitation, assignments of the Contracts and the Intellectual Property
(and consents thereto where required), bills of sale and documentation
relating to the authorization and completion of the purchase and sale
of the Purchased Assets and the Purchased Shares and the taking of all
actions and proceedings (corporate or otherwise) on or prior to
Closing in connection with the performance by the Purchaser and
Travelbyus of their obligations under this Agreement shall be
satisfactory to the Vendors and NAGE and their counsel, acting
reasonably and the Vendors and NAGE shall have received copies of all
such other documentation or other evidence as the Vendors and NAGE may
reasonably request in order to establish the consummation of the
transactions contemplated hereby by the Purchaser and Travelbyus, of
all corporate proceedings in connection herewith and compliance with
the terms, warranties and conditions hereof in form and substance and
satisfactory to the Vendors and NAGE and their counsel acting
reasonably.
(c) Regulatory Consents. There shall have been obtained from all
appropriate federal, state, municipal or other governmental or
administrative bodies such licences and authorizations as are required
to be obtained by the Purchaser and Travelbyus to permit the
completion of the transaction as herein contemplated, in form and
substance satisfactory to the Vendors and NAGE, acting reasonably.
(d) No Action or Proceeding. No legal or regulatory action or proceeding
shall
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be pending or threatened by any person to enjoin, restrict or prohibit
the purchase and sale of the Purchased Assets or the Purchased Shares
contemplated hereby.
(e) Legal Matters. All actions, proceedings, instruments and documents
required to implement this Agreement or instrumental hereto, shall
have been approved as to form and legality by counsel for the Vendors
and NAGE, acting reasonably.
(f) Legal Opinion. The Purchaser and Travelbyus shall have delivered to
the Vendors and NAGE a favourable opinion of counsel to the Purchaser
and Travelbyus in form and substance satisfactory to the Vendors and
NAGE and their counsel, acting reasonably.
(g) Employment Agreement. International Tours shall have executed an
employment agreement with Ron Blaylock setting out the terms and
conditions of employment, in form and substance satisfactory to Ron
Blaylock, acting reasonably.
(h) Escrow Agreements. The Purchaser, Travelbyus and GMP or the Escrow
Agent, as applicable, shall have executed and delivered to the Vendors
and NAGE the Closing Escrow Agreement and the Representation and
Warranty Escrow Agreement.
If any of the conditions precedent contained in this section 10.2 shall not
be performed or fulfilled at or prior to the Time of Closing to the
satisfaction of the Vendors and NAGE acting reasonably, the Vendors and
NAGE may, by notice to the Purchaser and Travelbyus terminate this
Agreement as well as the obligations of the Vendors and NAGE and the
Purchaser and Travelbyus under this Agreement other than the obligations
with respect to the payment of brokerage fees and commissions and the
obligations set forth in section 12.3. Any such condition may be waived in
whole or in part by the Vendors and NAGE without prejudice to any claims it
may have for breach of covenant, representation or warranty.
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ARTICLE 11
INDEMNIFICATION
11.1 Indemnification by the Vendors and NAGE
Subject to the provisions of sections 8.1 and 11.9, each of the Vendors and NAGE
jointly and severally (except that GalaxSea and NAGE are not indemnifying with
respect to any liability relating to International Tours and International Tours
is not indemnifying with respect to any liability relating to GalaxSea or NAGE)
indemnify and save harmless Travelbyus and the Purchaser without duplication
from all Losses suffered or incurred by Travelbyus and the Purchaser as a result
of or arising directly or indirectly out of or in connection with:
(a) any breach by a Vendor and/or NAGE of or any inaccuracy of any
representation or warranty of such Vendor and/or NAGE contained in
this Agreement or in any agreement, certificate or other document
delivered pursuant hereto (provided that such Vendor and/or NAGE shall
not be required to indemnify or save harmless the Purchaser and
Travelbyus in respect of any breach or inaccuracy of any
representation or warranty unless the Purchaser and Travelbyus shall
have provided notice to the Vendors and NAGE in accordance with
section 12.1 on or prior to the expiration of the applicable time
period related to such representation and warranty as set out in
section 8.1);
(b) any breach or non-performance by a Vendor or NAGE of any covenant
to be performed by it that is contained in this Agreement or in
any agreement, certificate or other document delivered pursuant
hereto;
(c) any debt, liability or obligation in respect of or arising from
the operation of the Purchased Business and/or the Purchased
Assets and/or IT Cruise of a Vendor or NAGE up to the Effective
Date
(d) except to the extent Taxes are reserved for on the IT Cruise Financial
Statements or the GalaxSea Financial Statements, as the case may be,
or in the books and records of IT Cruise or GalaxSea West, as the case
may be; (i) for any and all Taxes of IT Cruise or GalaxSea West, as
the case may be, with respect to all taxation years of IT Cruise or
GalaxSea West, as the case may be, ending on or prior to the Effective
Date; (ii) all Taxes allocated to NAGE or GalaxSea, as the case may
be, pursuant hereto; and (iii) any Losses, with respect to all
taxation years of IT Cruise or GalaxSea West, as the case may be, on
or prior to the Effective Date, arising out of or incidental to the
imposition, assessment or assertion of any such Taxes, including
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those incurred in connection with the assertion or defense of any
claim or assessment for such Taxes (collectively, the "Other
Amounts"). If, with respect to any Taxes, the taxation year of IT
Cruise or GalaxSea West, as the case may be, does not terminate on the
Effective Date, the notional Taxes (whether based on income, capital,
sale, transfer of ownership or provision of property or services or
otherwise) attributable to the taxation year of IT Cruise or GalaxSea
West, as the case may be, that includes the Effective Date shall be
allocated to; (i) NAGE or GalaxSea, as the case may be, for the period
up to and including the Effective Date; and (ii) Travelbyus-IT or
Travelbyus-GalaxSea, as the case may be, for the period subsequent to
the Effective Date. For the purposes of the section, Taxes for the
period up to and including the Effective Date shall be determined on
the basis of a closing of the books of IT Cruise or GalaxSea West, as
the case may be, as of the Effective Date. Any additional Taxes due up
to and including the Effective Date will be paid by NAGE or GalaxSea,
as the case may be, through an adjustment of the IT Cruise Purchase
Price or the GalaxSea Purchase Price, as the case may be. The notional
Tax calculations will be prepared based on the provisions of United
States and state income tax legislation in effect at the Effective
Date as if IT Cruise or GalaxSea West, as the case may be, had a year
end on the Effective Date. For greater certainty and without
limitation, each of Travelbyus-IT, Travelbyus-GalaxSea and NAGE shall
prepare or cause to be prepared in a manner consistent with past
practice and file or cause to be filed, all Tax Returns of NAGE or
GalaxSea with respect to periods ending on or before the Effective
Date. Tax Returns shall be subject to the review and approval of
Travelbyus-IT, Travelbyus-GalaxSea and Travelbyus provided that such
review and approval of NAGE Tax Returns shall be limited to the
reporting of the GalaxSea Assets and the GalaxSea Business and the
Purchased Shares and the IT Cruise Business. Tax Returns shall be
delivered to Travelbyus-IT, Travelbyus-GalaxSea and Travelbyus at
least 30 days prior to the due date for approval. Whenever any taxing
authority sends a notice of an audit, initiates an examination of IT
Cruise or GalaxSea West, as the case may be or otherwise asserts a
claim, makes an assessment, or disputes the amounts of Taxes for which
NAGE or GalaxSea is or may be liable under this Agreement, Travelbyus-
IT or Travelbyus-GalaxSea, as the case may be, shall promptly notify
NAGE or GalaxSea, as the case may be, and NAGE or GalaxSea, as the
case may be, shall have the right to control, at their own cost and
expense any resulting proceedings and to determine whether and when to
settle any such claim, assessment or dispute to the extent
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such proceedings or determinations affect the amount of Taxes for
which NAGE or GalaxSea, as the case may be, is liable under this
Agreement. For greater certainty and without limitation, each of
Travelbyus-IT, Travelbyus-GalaxSea, GalaxSea and NAGE shall inform and
provide the other Party with such assistance as may reasonably be
requested by either of them in connection with the preparation of any
Tax return, any audit or other examination in connection with the
preparation of any Tax return, any audit or other examination by any
taxing authority or any judicial or administrative proceedings
relating to liability for Taxes and each will retain and provide the
other Party with any records or information which may be relevant to
such Tax Return, audit or examination, proceedings or determination;
(e) for greater certainty and without limitation, the failure by the
Vendors and/or NAGE to file Tax returns as contemplated pursuant
to section 3.3;
(f) for greater certainty and without limitation, the breach by the
Vendors and/or NAGE of the provisions of section 3.5;
(g) for greater certainty and without limitation, the failure by the
Vendors and/or NAGE to pay or satisfy any of the Excluded
Liabilities;
(h) for greater certainty and without limitation, the failure by the
Vendors and/or NAGE to fulfil their obligations as provided in
section 9.4(a);
(i) for greater certainty and without limitation, the failure by the
Vendors and/or NAGE to pay any commission or other remuneration
payable or alleged to be payable to any broker, agent or other
intermediary who purports to act or have acted for or on behalf
of the Vendors and/or NAGE;
(j) any Claim that may be brought by Hickory Travel Systems, Inc.,
its Associates and/or Affiliates, successors and assigns, arising
by reason of, from and/or under that certain agreement between
International Tours and Hickory Travel Systems, Inc. dated
February 8, 1997 and the termination thereof pursuant to a a
termination letter from Hickory Travel Systems, Inc. dated July
31, 1998; and
(k) any Claim that may be brought by Woodside Travel Trust, its
Associates and/or Affiliates, successors and assigns, arising by
reason of, from and/or under that certain agreement between WTT,
Inc. doing business as Woodside Travel Trust and International
Tours
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dated July 20, 1993 and the termination thereof pursuant to
a mutually agreed upon agreement dated on or about July 9, 1999.
11.2 Indemnification by Travelbyus and the Purchaser
Subject to the provisions of sections 8.2 and 11.9 the Purchaser and Travelbyus
jointly and severally indemnify and save harmless each of the Vendors and NAGE
without duplication from all Losses suffered or incurred by such Vendors and
NAGE as a result of or arising directly or indirectly out of or in connection
with:
any breach by the Purchaser or Travelbyus of or any inaccuracy of any
representation or warranty contained in this Agreement or in any
agreement, instrument, certificate or other document delivered
pursuant hereto (provided that the Purchaser or Travelbyus shall not
be required to indemnify or save harmless such Vendor and NAGE in
respect of any breach or inaccuracy of any representation or warranty
unless such Vendor or NAGE, as applicable, shall have provided notice
to the Purchaser or Travelbyus in accordance with section 12.1 on or
prior to the expiration of the applicable time period related to such
representation and warranty as set out in section 8.2);
any breach or non-performance by the Purchaser or Travelbyus of any
covenant to be performed by it that is contained in this Agreement or
in any agreement, certificate or other document delivered pursuant
hereto;
any debt, liability or obligation in respect of or arising from the
operation of the Purchased Business and/or the Purchased Business
and/or IT Cruise after the Effective Date including without
limitation, any failure by the Purchaser to pay, satisfy, discharge,
perform or fulfill on a timely basis any of the Assumed Liabilities;
for greater certainty and without limitation, the failure by the Purchaser
to file Tax returns as contemplated pursuant to section 2.3; and
for greater certainty and without limitation, the failure by the Purchaser
and/or Travelbyus to pay any commission or other remuneration payable
or alleged to be payable to any broker, agent or other intermediary
who purports to act or have acted for or on behalf of the Purchaser
and/or Travelbyus.
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11.3 Notice of Claim
In the event that a Party (the "Indemnified Party") shall become aware of any
claim, proceeding or other matter (a "Claim") in respect of which the other
Party (the "Indemnifying Party") agreed to indemnify the Indemnified Party
pursuant to this Agreement, the Indemnified Party shall promptly give written
notice thereof to the Indemnifying Party. Such notice shall specify whether the
Claim arises as a result of a claim by a person against the Indemnified Party (a
"Third Party Claim") or whether the Claim does not so arise (a "Direct Claim")
and shall also specify with reasonable particularity (to the extent that the
information is available) the factual basis for the Claim and the amount of the
Claim, if known. If, through the fault of the Indemnified Party, the
Indemnifying Party does not receive notice of a Claim in time to effectively
contest the determination of any liability susceptible of being contested, the
Indemnifying Party shall be entitled to set off against the amount claimed by
the Indemnified Party the amount of any Losses incurred by the Indemnifying
Party resulting from the Indemnified Party's failure to give such notice on a
timely basis.
11.4 Direct Claims
With respect to any Direct Claim, following receipt of notice from the
Indemnified Party of the Claim, the Indemnifying Party shall have 30 days to
make such investigation of the Claim as is considered necessary or desirable.
For the purpose of such investigation, the Indemnified Party shall make
available to the Indemnifying Party the information relied upon by the
Indemnified Party to substantiate the Claim, together with all such other
information as the Indemnifying Party may reasonably request. If both Parties
agree at or prior to the expiration of such 30 day period (or any mutually
agreed upon extension thereof) to the validity and amount of such Claim, the
Indemnifying Party shall immediately pay to the Indemnified Party the full
agreed upon amount of the Claim (and for grater certainty and without
limitation, the procedures in the Representation and Warranty Agreement and
section 11.8 hereof shall be utilized.
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11.5 Third Party Claims
With respect to any Third Party Claim, the Indemnifying Party shall have the
right, at its expense, to participate in or assume control of, the negotiation,
settlement or defence of the Claim and, in such event, the Indemnifying Party
shall reimburse the Indemnified Party for the Indemnified Party's out-of-pocket
expenses incurred up to the point the Indemnifying Party assumed such control.
If the Indemnifying Party elects to assume such control, the Indemnified Party
shall have the right to participate in the negotiation, settlement or defence of
such Third Party Claim and to retain counsel to act on its behalf, provided that
the fees and disbursements of such counsel shall be paid by the Indemnified
Party unless the Indemnifying Party consents to the retention of such counsel or
unless the named parties to any action or proceeding include both the
Indemnifying Party and the Indemnified Party and a representation of both the
Indemnifying Party and the Indemnified Party by the same counsel would be
inappropriate due to the actual or potential differing interests between them
(such as the availability of different defense). If the Indemnifying Party,
having elected to assume such control, thereafter fails to defend the Third
Party Claim within a reasonable time, the Indemnified Party shall be entitled to
assume such control and the Indemnifying Party shall be bound by the results
obtained by the Indemnified Party with respect to such Third Party Claim. If
any Third Party Claim is of a nature such that the Indemnified Party is required
by applicable law to make a payment to any person (a "Third Party") with respect
to the Third Party Claim before the completion of settlement negotiations or
related legal proceedings, the Indemnified Party may make such payment with the
written consent of the Indemnifying Party and the Indemnifying Party shall,
forthwith after demand by the Indemnified Party, reimburse the Indemnified Party
for such payment. If the amount of any liability of the Indemnified Party under
the Third Party Claim in respect of which such a payment was made, as finally
determined, is less than the amount that was paid by the Indemnifying Party to
the Indemnified Party, the Indemnified Party shall, forthwith after receipt of
the difference from the Third Party, pay the amount of such difference to the
Indemnifying Party.
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11.6 Settlement of Third Party Claims
If the Indemnifying Party assumes control of the defence of any Third Party
Claim, the Indemnifying Party shall have the exclusive right to contest, settle
or pay the amount claimed, provided that the Indemnifying Party shall not settle
any Third Party Claim without the written consent of the Indemnified Party,
which consent shall not be unreasonably withheld or delayed; provided however
that the liability of the Indemnifying Party shall be limited to the proposed
settlement amount if any such consent is not obtained for any reason. If the
Indemnified Party assumes control of the defence of any Third Party Claim, the
Indemnified Party shall have the exclusive right to contest, settle or pay the
amount claimed, provided that the Indemnified Party shall not settle any Third
Party Claim without the written consent of the Indemnifying Party, which consent
shall not be unreasonably withheld or delayed; provided however that the
liability of the Indemnified Party shall be limited to the proposed settlement
amount if any such consent is not obtained for any reason.
11.7 Co-operation
The Indemnified Party and the Indemnifying Party shall co-operate fully with
each other with respect to Third Party Claims, and shall keep each other fully
advised with respect thereto (including supplying copies of all relevant
documentation as promptly as it becomes available).
11.8 Set-Off under Representation and Warranty Escrow Agreement
In addition to any other rights and remedies available to Travelbyus and
the Purchaser under this Agreement or any agreement delivered
hereunder or available to Travelbyus and the Purchaser at law,
Travelbyus and the Purchaser shall, subject to a final determination
of any such Claims as set forth in (b) below, have the right to deduct
from and set-off against (and thereby reduce or extinguish entirely)
any monies owing by Travelbyus and the Purchaser to the Vendors and
NAGE hereunder the amount of any Claims which the Purchaser and
Travelbyus shall bona fide allege are owing as a result of a breach of
any of the representations, warranties, covenants or agreements or
claim for indemnification of the Vendors and/or NAGE contained in this
Agreement or in any agreement or instrument delivered hereunder.
No deduction or set-off may be made by Travelbyus and/or the Purchaser
until it is determined, either by agreement between the Purchaser and
Travelbyus and the Vendors and NAGE or by final order or judgment of a
court of competent jurisdiction, as to the legitimacy of any Claim and
the amount of damages or other relief available as a consequence of
such Claim.
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The provisions of this section 11.8 shall not affect any other legal remedy
available to Travelbyus or the Purchaser to enforce payment by the
Vendors and NAGE or any other Party of any amounts which they may
become liable to pay to Travelbyus or the Purchaser as a result of
their breach of any of the representations, warranties, covenants,
indemnities or agreements contained in this Agreement.
Subject to a final determination of any such Claim as set forth in (b)
above, the Vendors and NAGE hereby covenant and agree to authorize the
Escrow Agent under the Representation and Warranty Escrow Agreement to
release to Travelbyus or the Purchaser (or as directed) any monies
necessary to satisfy such Claim from the escrowed amount held by the
Escrow Agent under the Representation and Warranty Escrow Agreement
and the escrowed amount shall be reduced accordingly, all in
accordance and subject to the terms of the Representation and Warranty
Escrow Agreement.
The Vendors and NAGE shall be liable for any deficiency in respect of any
Claim in accordance with the terms hereof.
11.9 Exclusivity
The provisions of this Article 11 shall apply to any Claim for a breach of any
covenant, representation, warranty or other provision of this Agreement or any
agreement, certificate or other document delivered pursuant to this Agreement
(other than a Claim for specific performance or injunctive relief) with the
intent that all such Claims shall be subject to the provisions contained in this
Article 11.
ARTICLE 12 - MISCELLANEOUS
12.1 Notices
Any notice or other communication required or permitted to be given hereunder
shall be in writing and shall be delivered in person, transmitted by telecopy or
by similar means of recorded electronic communication or sent by registered
mail, charges prepaid, addressed as follows:
if to the Vendors and NAGE:
13150 Coit Road
Suite 125
Dallas, Texas
75240
U.S.A.
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Attention: Mr. Ed H. Hawes II
Telecopier No.: (972) 671-1134
with a copy to:
Glast, Phillips & Murray, PC
2200 One Gallena Tower
13355 Noel Road
Dallas, Texas 75240
Attention: Mike Parsons
Telecopier No.: (972) 419-8329
if to the Purchaser or Travelbyus:
204 - 3237 King George Highway
South Surrey, BC V4P 1BY
Attention: Bill Kerby
Telecopier No.: (604) 541-2450
with a copy to:
Cassels Brock & Blackwell
Barristers and Solicitors
Scotia Plaza, Suite 2100
40 King Street West
Toronto ON M5H 3C2
Attention: John H. Craig
Telecopier No.: (416) 360-8877
Any such notice or communication shall be deemed to have been given and received
on the day on which it was delivered by overnight courier of recognized standing
or transmitted by facsimile transmission if confirmation of receipt is received
(or if such day is not a Business Day, on the next following Business Day) or,
if mailed, certified mail, return receipt requested, on the third Business Day
following the date of mailing; provided however that if at the time of mailing
or within three Business Days thereafter there is or there occurs a labour
dispute or other event that might reasonably be expected to disrupt the delivery
of documents by mail, any notice or other communication hereunder shall be
delivered or transmitted by means of recorded electronic communication as
aforesaid. Any Party may at any time change its address for service from time
to time by giving notice to the other Parties in accordance with this section
12.1.
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12.2 Public Notices
All public notices to third persons and all other publicity concerning the
transaction contemplated herein shall be jointly planned and co-ordinated by the
Vendors, NAGE, Travelbyus and the Purchaser and no Party shall act unilaterally
in this regard without the prior approval of the other Parties, such approval
not to be unreasonably withheld, except:
in the case of the Purchaser or Travelbyus, for communications made in
confidence to GalaxSea Transferred Employees and International Tours
Transferred Employees affected by the transaction contemplated hereby
who shall be informed of the confidential nature of the transaction
and who agree to keep such information confidential; or
where required to do so by law or by the applicable regulations or
policies of any regulatory agency of competent jurisdiction or any
stock exchange in circumstances where prior consultation with the
other Parties is not practicable.
12.4 Counterparts and Facsimile
This Agreement may be executed in counterparts, each of which shall constitute
an original and all of which taken together shall constitute one and the same
instrument.
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IN WITNESS WHEREOF this Agreement has been executed by the parties hereto.
INTERNATIONAL TOURS, INC.
Per: /s/ Ron Blaylock
--------------------------------------
GALAXSEA CRUISES AND TOURS, INC.
Per: /s/ Ted C. Parker, Jr.
--------------------------------------
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION
Per: /s/ E.H. Hawes, II
--------------------------------------
TRAVELBYUS-IT INCORPORATED
Per: /s/ William Kerby
--------------------------------------
TRAVELBYUS-GALAXSEA INCORPORATED
Per: /s/ William Kerby
--------------------------------------
TRAVELBYUS.COM LTD.
Per: /s/ William Kerby
--------------------------------------
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