<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
--------------------------------------
[ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-5474
NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION
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(Exact name of small business issuer as specified in its charter)
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<S> <C>
Delaware 75-2571032
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(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
</TABLE>
13150 Coit Road, Suite 125, Dallas, Texas 75240
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(Address of principal executive offices)
( 972 ) 671 - 1133
-----------------------------
(Issuer's telephone number)
Check whether the issuer (1) has filed all reports required to be filed by
Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months, and (2) has been subject to such filing requirements for the past 90
days.
Yes xxx No
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Number of shares of common stock, par value $.01 per share, outstanding as of
September 30, 2000: 31,162,091
Transitional Small Business Disclosure Format (Check One): Yes No xxx
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<PAGE>
PART 1 FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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<CAPTION>
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September 30, December 31,
2000 1999
(Unaudited)
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<S> <C> <C>
ASSETS
Current Assets:
Cash $ 168,631 $ 248,491
Accounts receivable, net of allowance for doubtful
accounts of $32,206 (1999) 67,666 110,843
Investment in available-for-sale securities 216,937 1,460,000
Investments - restricted - 194,101
Prepaid expenses 112,791 1,874
---------- ----------
Total Current Assets 566,025 2,015,309
---------- ----------
Furniture And Equipment, net of accumulated depreciation 12,619 21,309
---------- ----------
Other Assets:
Deferred tax asset 47,000 -
Deposits and other 3,246 3,246
Investments - other 670,543 382,479
---------- ----------
Total Other Assets 720,789 385,725
---------- ----------
Total Assets $1,299,433 $2,422,343
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable, accrued liabilities and other $ 140,015 $ 471,557
Current portion of long-term debt 60,000 -
Deferred tax liability - 97,137
Preferred stock dividends payable 295,503 447,018
---------- ----------
Total Current Liabilities 495,518 1,015,712
Notes Payable - long-term 424,987 781,369
---------- ----------
Total Liabilities 920,505 1,797,081
---------- ----------
Commitments And Contingencies
Stockholders' Equity:
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 417,886 417,886
Additional paid-in capital 466,959 466,959
Treasury stock, 10,626,461 shares (2000)
and 8,667,632 shares (1999), at cost (131,264) (111,676)
Accumulated other comprehensive income 8,704 548,562
Accumulated deficit (383,357) (696,469)
---------- ----------
378,928 625,262
---------- ----------
Total Liabilities and Stockholders' Equity $1,299,433 $2,422,343
========== ==========
1
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The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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<CAPTION>
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NINE MONTHS ENDED QUARTER ENDED
30-Sep-00 30-Sep-99 30-Sep-00 30-Sep-99
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<S> <C> <C> <C> <C>
Revenue:
Video poker $ - $ 4,128,171 $ - $ -
Truck stop and convenience store - 1,905,959 - -
Cruise - 667,466 - 163,076
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- 6,701,596 - 163,076
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Costs and expenses - 4,189,265 - 60,901
General and administrative 522,390 2,255,916 111,191 230,182
Depreciation and amortization 8,640 319,259 2,830 86,187
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Operating income (loss) (531,030) (62,844) (114,021) (214,194)
Interest expense (22,772) (167,749) (3,915) (33,942)
Income from equity investments 288,064 107,363 77,814 37,278
Gain on sale of investments 422,280 597,857 1,483 -
Other income (expense) 60,431 66,936 441 9,047
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Income Before Provision for Income
Taxes and Extraordinary Gain 216,973 541,563 (38,198) (201,811)
Provision For Income Taxes (86,458) (216,471) (15,414) (23,206)
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Income before extraordinary gain 130,515 325,092 (53,612) (225,017)
Extraordinary gain, net of
Deferred Tax Expense of $94,065 182,597 - - -
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Net income (loss) $ 313,112 $ 325,092 $ (53,612) $ (225,017)
==========================================================================
Basic income Per Share
Before Extraordinary Gain $ * $ * $ * $ *
==========================================================================
Extraordinary Gain Per Share $ * $ * $ * $ *
==========================================================================
Basic Net Income Per Share $ .01 $ * $ * $ *
==========================================================================
Basic Weighted Average Shares
Outstanding 31,815,034 36,313,542 31,162,091 33,620,920
==========================================================================
* Less than $0.01 per share
2
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The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
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Nine Months Ended September 30,
2000 1999
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<S> <C> <C>
Net Income $ 313,112 $ 325,092
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Other Comprehensive Income (Loss):
Unrealized gains (losses) on available-for-sale securities
net of deferred income tax benefit of $134,533 (2000) (261,153) -
Reclassifications, net of deferred tax expense of $143,575 (278,705) -
---------- ----------
(539,858) -
---------- ----------
Total Comprehensive Income (Loss) $ (226,746) $ 325,092
========== ==========
3
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The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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Nine Months Ended September 30,
2000 1999
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<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 313,112 $ 325,092
Adjustments to reconcile net cash:
Depreciation and amortization 8,640 319,259
Deferred tax expense benefit 180,523 111,500
Income from equity investments (288,064) (107,363)
Gain on sale of securities and assets (422,280) (597,858)
Extraordinary gain (276,662) -
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable 43,177 (34,525)
Inventories - (12,177)
Prepaid expenses 1,874 25,544
Deposits and other - 1,320
Increase (decrease) in:
Accounts payable and accrued liabilities (123,194) (37,209)
---------- ----------
Net Cash Provided By (Used In) Operating Activities (562,874) ( 6,417)
---------- ----------
Cash Flows From Investing Activities:
(Purchases) disposition of property, plant and equipment 50 (345,611)
Proceeds from Kings sale of fixed assets - 325,000
Proceeds from sale of securities 800,825 -
Repayment by borrowers - 32,016
---------- ----------
Net Cash Provided By (Used In) Investing Activities 800,875 11,405
---------- ----------
Cash Flows From Financing Activities:
Repurchase of stock (19,588) -
Proceeds from notes payable - 125,887
Payments on borrowings and dividends (298,273) (294,569)
---------- ----------
Net Cash Provided By (Used In) Financing Activities (317,861) (168,682)
---------- ----------
Net Decrease In Cash (79,860) (163,694)
Cash, beginning of year 248,491 281,109
---------- ----------
Cash, end of period $ 168,631 $ 117,415
========== ==========
Non-Cash Investing and Financing Activities:
Payment of commission payable with securities $ 194,101 $ -
========== ==========
Change in unrealized gain on available for sale
securities, net of deferred income taxes of
$323,913 (2000) $ 539,858 $ -
========== ==========
Repurchase of treasury stock and settlement of
debentures, dividends payable and accrued interest
for a note payable $ 175,000 $ -
========== ==========
4
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The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
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1. OPINION OF MANAGEMENT
The preceding financial information has been prepared by the Company pursuant to
the rules and regulations of the Securities and Exchange Commission ("SEC") and,
in the opinion of the Company, includes all normal and recurring adjustments
necessary for a fair statement of the results of each period shown. Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to SEC rules and regulations. The
Company believes that the disclosures made are adequate to make the information
presented not misleading. It is suggested that these financial statements be
read in conjunction with the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1999.
2. RESTRUCTURE OF OM OPERATING, L.L.C. AND RIVER PORT TRUCK STOP, LLC
Effective April 15, 1998, the Company and Donald I. Williams ("Williams")
entered into Amendment No. One (the "Amendment") to the Operating Agreement (the
"Operating Agreement") of Operator to effect a restructuring of Operator which
the Company 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"). 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 entered into further amendments to
the Operating Agreement and various documents put into place in conjunction with
the Amendment, and agreed to transfer 50% of its remaining Louisiana gaming
interest (including 50% of its interest in Operator, RPLLC 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
5
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<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
================================================================================
2. RESTRUCTURE OF OM OPERATING, L.L.C. AND RIVER PORT TRUCK STOP, LLC
(CONTINUED)
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 original principal amount of subordinated debentures,
and were owed accrued dividends of $255,072 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 of 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 146LLC, on behalf of the North Louisiana Group, a 24.5% interest in
Operator and a 25% interest in RPLLC; and (c) agreed to assign to 146LLC, on
behalf 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.
6
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<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
================================================================================
2. RESTRUCTURE OF OM OPERATING, L.L.C. AND RIVER PORT TRUCK STOP, LLC
(CONTINUED)
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 interest 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 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 casino, 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.
7
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<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
================================================================================
2. RESTRUCTURE OF OM OPERATING, L.L.C. AND RIVER PORT TRUCK STOP, LLC
(CONTINUED)
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 Ozdon Investments, Inc.
("Ozdon") to Operator. Ozdon and Operator have entered into a Lease Agreement
(the "Lease") effective March 31, 1999 for an initial term of nine 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. Ozdon 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, Ozdon 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
Ozdon 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 Regents
Bank, Springhill Branch, formerly known as Springhill Bank & Trust Company,
which is secured by a mortgage on the Gold Rush Truck Stop. As of September 30,
2000, the outstanding principal balance of such indebtedness was approximately
$202,074. Ozdon has given Operator notice that the Lease will be terminated.
Upon termination of the Lease, Ozdon plans to enter into a new lease with a
nonaffiliated party.
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
interest that are a part of King's Lucky 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.
8
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<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
================================================================================
2. RESTRUCTURE OF OM OPERATING, L.L.C. AND RIVER PORT TRUCK STOP, LLC
(CONTINUED)
Pursuant to the Settlement Agreement, the Operating Agreement of RPLLC (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 interest 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 become
effective March 31, 1999.
The Second Amendment and amendment to the River Port Operating Agreement, which
were effective midnight March 31, 1999, constitute a transfer of ownership
interest and control in all of the Company's gaming operations. As of April 1,
1999, ownership of OM, RPLLC and the Gold Rush Truck Stop are as follows:
North Louisiana
Company Group Williams Total
------- --------------- -------- -------
OM 24.5% 24.5% 51.0% 100.0%
RPLLC 25.0% 25.0% 50.0% 100.0%
Ozdon 50.0% 50.0% - 100.0%
Therefore, the Company has recorded its investment in OM, RPLLC and Ozdon under
the equity method from April 1, 1999.
Prior to the effective date of the Second Amendment and amendment to the River
Port Operating Agreement, the application of the existing agreements resulted in
the Company controlling the gaming operations and 100% of the net gaming income
being allocated to the Company and 0% to Williams. Therefore, the financial
statements of OM, RPLLC and Ozdon were consolidated with the Company through
March 31, 1999.
On March 27, 2000, the other two members of Operator and RPLLC purportedly voted
to merge another limited liability company into each of Operator and RPLLC and
buyout the Company's interest in each for $375,000 and $50,000, respectively.
The Articles of Organziation of each of Operator and RPLLC require that a
member's interest may not be changed and the Articles of Organization may not be
amended without unanimous consent of all members. The Company voted against the
purported mergers and buyout and subsequently filed a lawsuit to nullify the
mergers and buyout. If the purported mergers and buyouts are upheld by the
court, the Company will receive $425,000 of cash and will recognize a gain on
the sale of its interests in the Operator and RPLLC of approximately $98,000 and
reverse its share of income (loss) booked related to Operator and RPLLC from
April 1, 2000 to the current date. As of September 30, 2000, the Company's
share of income from Operator and RPLLC (excluding Ozdon) for the six months
ended September 30, 2000 was $125,098.
9
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<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
================================================================================
2. RESTRUCTURE OF OM OPERATING, L.L.C. AND RIVER PORT TRUCK STOP, LLC
(CONTINUED)
The following is a combined condensed unaudited balance sheet for the Operator,
RPLLC and Ozdon as of September 30, 2000 and the combined condensed unaudited
statement of income for the nine months then ended.
CONDENSED BALANCE SHEET
(UNAUDITED)
September 30, 2000
Assets
Current assets $1,391,000
Fixed assets, net 3,194,000
Other assets 214,000
----------
$4,799,000
==========
Liabilities and Equity
Current liabilities $2,951,000
Long-term liabilities 170,000
----------
3,121,000
Equity 1,678,000
----------
$4,799,000
==========
CONDENSED STATEMENT OF INCOME
(UNAUDITED)
Nine Months Ended September 30, 2000
Revenues $12,261,000
Cost of revenues 7,763,000
-----------
Gross profit 4,498,000
General and administrative 3,152,000
-----------
Operating profit $ 1,346,000
Other (94,000)
-----------
Net Income $ 1,252,000
===========
10
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<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
================================================================================
3. INVESTMENT SECURITIES
Investment securities which are all considered available-for-sale are summarized
as follows:
September 30, December 31,
2000 1999
------------- ------------
Marketable equity securities, at cost $203,000 $ 580,000
Unrealized gains 14,000 880,000
-------- ----------
Marketable equity securities, fair market value $217,000 $1,460,000
======== ==========
In addition, the Company had marketable equity securities with an original cost
of $194,101 which were restricted to be distributed to an officer and consultant
in satisfaction of commissions on the sale of the cruise operations. The shares
were sold on behalf of or distributed to the officer and consultant during the
nine months ended September 30, 2000.
4. EXTRAORDINARY GAIN
Effective April 1, 2000, the Company acquired 1,958,829 shares of common stock
from individuals for $19,588. In addition, the Company settled the following
liabilities to the individuals for $30,412 in cash and a $175,000 note payable:
Subordinated debentures $173,500
Preferred stock dividends payable 151,000
Accrued interest 157,500
--------
$482,000
========
The transaction resulted in an extraordinary gain before taxes on the settlement
of debt of approximately $276,500. The note bears interest at 8.5%, is due in
quarterly installments of $15,000 plus interest and is collateralized by a
portion of the Company's investment in available- for-sale securities.
11
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<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
================================================================================
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
LIQUIDITY AND CAPITAL RESOURCES
General: As noted in Note 2 of the Notes to Consolidated Financial Statements
(Unaudited), the other two members of Operator and RPLLC have purportedly voted
in favor of a merger resulting in the termination of the Company's interests in
Operator and RPLLC for a buyout of $375,000 and $50,000, respectively, and the
Company has filed a lawsuit seeking to nullify the purported mergers and
buyouts, among other relief. Until the court renders final judgment in the
lawsuit, no final determination can be made whether the purported mergers and
buyouts are effective. If they are upheld, the Company will receive $425,000 of
cash and will recognize a gain on the sale of its interests in Operator and
RPLLC of approximately $98,000. If the court sets them aside, as requested by
the Company, the Company will continue to report its share of income or loss
from Operator and RPLLC. The discussion of Operator and RPLLC, and the
Company's ownership interests in them, contained in this Management's Discussion
and Analysis or Plan of Operation assumes that the purported mergers and buyouts
will be set aside and the Company's ownership interests will be reinstated.
The structure of Operator and RPLLC and the various interests (including revenue
and profits interest) of the Company in Operator and RPLLC have been
restructured in an attempt to satisfy certain concerns raised by the Division.
The Company believes the further restructuring of Operator and RPLLC 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 RPLLC for their review in connection with Operator's license
renewal request and the granting of a license to RPLLC. There can be no
assurance that the Gaming Control Board will agree with the Company's conclusion
that Operator and RPLLC, as restructured, comply with the residency requirements
of the Louisiana Act, but the Company believes the Gaming Control Board will
agree with the current structure. The Company does not believe the review will
result in further material adverse changes in Operator's or RPLLC`s structure,
but it cannot predict the results of the review until the review is completed.
The Company will seek to meet its long-term liquidity needs primarily through
cash flow from operations, additional sales of Travelbyus.com securities,
restructuring its payment obligations on certain subordinated debt, 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 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 quarter with $168,631 in cash and
other current assets amounting to $397,394 including accounts receivable (net)
of $67,666, investments in 175,000 shares of Travelbyus common stock with a
value of $216,937 and refundable income taxes of $112,791. Total liabilities
were $920,505 at September 30, 2000, including accounts payable and accrued
liabilities of $140,015, long-term notes payable of $484,987 and preferred stock
dividends payable of $295,503. The Company's liabilities decreased $876,576
from $1,797,081 at December 31, 1999 to $920,505 at September 30, 2000. This
decrease was comprised primarily of a decrease in accounts payable, the deferred
tax liability related to the unrealized gain on Travelbyus.com common stock, and
the payoff of long-term debt, along with the settlement of debt of approximately
$482,000.
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Competition is intense for the business of gaming patrons in Louisiana and
Mississippi. It is expected that profit margins may continue to be adversely
affected as a result of such competition and that various gaming establishments
may be forced to close because they cannot compete effectively at such reduced
margins. The Company believes Ozdon, Operator and RPLLC will be able to
maintain a competitive position if they are able to carefully manage expenses
and cash flow. However, there can be no assurance in this regard and the
Company has no control over such management by Operator or RPLLC. Ozdon and
Operator have been parties to a month-to-month lease pursuant to which Ozdon
leased the Gold Rush Truck Stop to Operator. The lease is terminable by either
party, with or without cause, on sixty days' prior written notice. Ozdon has
given Operator notice that the lease will be terminated. Upon termination of
the Lease, Ozdon plans to enter into a new lease with a nonaffiliated party.
RESULTS OF OPERATIONS
Comparison of Nine Months Ended September 30, 2000 to Nine Months Ended
-----------------------------------------------------------------------
September 30, 1999
------------------
Operating Income (Loss)
-----------------------
The Company recorded a loss from operations of $531,030 during the nine months
ended September 30, 2000 compared to a loss from operations of $62,844 for the
nine months ended September 30, 1999. The decline in operating profitability is
due to the Company's sale of a significant portion of its gaming operations
effective April 1, 1999 and the sale of its cruise operations effective October
1, 1999.
During the three months ended March 31, 1999, the Company generated gross
profit from its gaming and truck stop operations of $2,090,374 on revenues of
$6,034,130. Upon the sale of a significant portion of the Company's interest in
the gaming operations, April 1, 1999, the Company now records income from gaming
and truck stop operations under the equity method as "Income for Equity
Investments" in Other Income (Expense). For the six months, ended September 30,
1999, the Company recorded income from its equity investment of $107,363. The
gaming and truck stop operations, run by the Operator, generated approximately
$1,504,000 of gross profits on revenues of approximately $4,199,000 during the
quarter ended March 31, 2000. The decline in revenues during the first quarter
of 2000 is due to the fact that the Operator has closed down or sold two
locations since March 31, 1999. Gross profit percentage in 2000 is up to 35.5%
compared to 34.6% for 1999. (See comparison of income from equity investments
below.)
During the nine months ended September 30, 1999, the Company recorded gross
profit from its cruise operations of $361,206 and $0 for the nine months ended
September 30, 2000 as the Company sold its cruise operations in the fourth
quarter of 1999.
During the nine months ended September 30, 1999, the Company recorded general
and administrative costs of $2,255,916 compared to $522,390 during the nine
months ended September 30, 2000. The primary reason for the decline is due to
the sale of a significant portion of the Company's interest in gaming operations
and its cruise operations during 1999 and the related decrease in overhead
costs.
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RESULTS OF OPERATIONS (CONTINUED)
Interest Expense
----------------
The Company recorded interest expense of $167,749 for the nine months ended
September 30, 1999 compared to $22,772 for the nine months ended September 30,
2000. The decline in interest expense is attributable to the debt on the
construction of a new truck stop and casino for which the Company sold a
significant interest effective April 1, 1999. In addition, due to the
restructuring of the gaming operations, subordinated debt of $400,860 were
cancelled effective April 1, 1999 and the Company paid off or settled
approximately $750,000 of debt during the nine months ended September 30, 2000.
Income from Equity Investments
------------------------------
As discussed in Note 2, the gaming and truck stop operations recorded gross
profit for the nine months ended September 30, 2000 of approximately $4,498,000.
In addition, the gaming and truck stops incurred approximately $3,152,000 of
general and administrative expenses and $94,000 of other expenses during the
same nine months. The result was net income from gaming and truck stop
operations of approximately $1,252,000 of which the Company's share was $288,064
(including Ozdon). The Company's share of income for the six months ended
September 30, 1999 was $107,363 while, during the quarter ended March 31, 1999,
the Company recorded 100% of the gaming and truck stop operations (see above
discussion.)
As noted in Note 2 of the Notes to Consolidated Financial Statements
(Unaudited), the other two members of Operator and RPLLC have purportedly voted
in favor of a merger resulting in the termination of the Company's interests in
Operator and RPLLC for a buyout of $375,000 and $50,000, respectively, and the
Company has filed a lawsuit seeking to nullify the purported mergers and
buyouts, among other relief. Until the court renders final judgment in the
lawsuit, no final determination can be made whether the purported mergers and
buyouts are effective. If they are upheld, the Company will receive $425,000 of
cash and will recognize a gain on the sale of its interests in Operator and
RPLLC of approximately $98,000. If the court sets them aside, as requested by
the Company, the Company will continue to report its share of income or loss
from Operator and RPLLC
Gain on Sale of Investments
---------------------------
During the nine months ended September 30, 2000, the Company sold Travelbyus.com
common stock resulting in a gain of $422,280. During the nine months ended
September 30, 1999, the Company sold a portion of its investments in Operator,
RPLLC and the Gold Rush Truck Stop resulting in a gain of approximately
$598,000.
Year 2000 Issues
----------------
The Company made the transition through the change to the year 2000 without
apparent service interruption and with no apparent effects from the year 2000
change. We will continue to monitor our information technology and non-
information technology systems as well as those of our third-party vendors and
suppliers. We spent approximately $23,000 during 1999 on hardware and software
upgrades and approximately $15,000 for labor and testing in preparation of the
change to the year 2000. We do not anticipate that material expenditures
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Year 2000 Issues (Continued)
----------------------------
will be required in the year 2000 to further upgrade our systems, nor do we
expect our third-party vendors and suppliers to have significant year 2000
problems based on our experience to date.
Forward Looking Statements
--------------------------
Statements that are not historical facts included in this Form 10-QSB are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 that involve risks and uncertainties that could
cause actual results to differ from projected results. Such statements address
activities, events or developments that the Company expects, believes, projects,
intends or anticipates will or may occur, including such matters as future
capital, debt restructuring, the possible effects of anti-gaming sentiment, the
restructuring of Operator and RPLLC maintaining or increasing fuel sales,
compliance with other gaming law requirements, maintaining a competitive
position in the Company's market, pending legal proceedings, new lease and other
contractual arrangements, business strategies, expansion results to differ
materially ("Cautionary Disclosures") are described throughout this Form 10-
QSB. Cautionary disclosures include, among others: general economic conditions,
the Company's ability to find, acquire, market, develop, and produce new
properties, the strength and financial resources of the Company's competitors,
anti-gaming sentiment, labor relations, availability and cost of material and
equipment, the results of debt restructuring efforts, regulatory developments
and compliance, pending legal proceedings and possible new lease and other
contractual arrangements. All written and oral forward-looking statements
attributable to the Company are expressly qualified in their entirety by the
Cautionary Disclosures. The Company disclaims any obligation to update or revise
any forward-looking statement to reflect events or circumstances occurring
hereafter or to reflect the occurrence of anticipated or unanticipated events.
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
In the lawsuit styled North American Gaming and Entertainment Corporation v. OM
Operating L.L.C., River Port Truck Stop, L.L.C., Donald I. Williams, Loy F.
Weaver and The 146, L.L.C., Civil Action No. CV00-0575S, United States District
Court, Western District of Louisiana, Shreveport Division, a hearing was held on
the Company's motion for preliminary injunction to unwind the purported mergers
pending final resolution of the case. The judge denied the Company's motion on
the grounds that the Company would be compensable with monetary damages in the
event it is successful on the merits. The case is presently scheduled for trial
on the merits on May 21, 2001.
ITEMS 2, 4 AND 5 ARE OMMITED FROM THIS REPORT AS INAPPLICABLE
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
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At September 30, 2000, the Company was in arrears on the subordinated debentures
to the extent of $322,371, in principal and approximately $102,500 in interest.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Quarterly Report on Form
10-QSB:
Exhibit
Number Description of Exhibits
------- -----------------------
(a) The following exhibits are filed as part of this Form 10-QSB pursuant
to Item 601 of Regulation S-B:
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 2.1.6 to the Company's Quarterly
Report on Form 10-QSB for the second quarter of 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 third quarter
of 1998, and incorporated herein by reference.
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*27.1 Financial data schedule required by Item 601 of Regulation S-B.
-----
* Filed herewith
(b) Reports on Form 8-K.
None.
In accordance with the requirement of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTH AMERICAN GAMING AND
ENTERTAINMENT CORPORATION
(Registrant)
/s/ E. H. HAWES
By: ___________________________
Chairman of the Board and
Chief Executive Officer
Date: November 8, 2000
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