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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period ____________ to _____________
Commission file number 0-5474
NORTH AMERICAN GAMING
AND ENTERTAINMENT CORPORATION
(Name of small business issuer in its charter)
Delaware 75-2571032
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13150 Coit Road, Suite 125, Dallas, Texas 75240
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (972) 671-1133
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.01 per share
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the issuer was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
YES X NO
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained herein, and none will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year were: $6,033,627.
The aggregate market value of the voting common stock held by non-affiliates of
the issuer, based on the average bid and asked price of such stock, was $933,062
as March 1, 2000.
At March 1, 2000, the registrant had outstanding 33,120,920 shares of par value
$.01 common stock.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Transitional Small Business Disclosure Format (check one):
Yes No X
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TABLE OF CONTENTS
ITEM 1. DESCRIPTION OF BUSINESS........................................... 1
ITEM 2. DESCRIPTION OF PROPERTY........................................... 15
ITEM 3. LEGAL PROCEEDINGS................................................. 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............... 16
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.......... 17
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION......... 18
ITEM 7. FINANCIAL STATEMENTS.............................................. 22
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................... 22
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT................. 23
ITEM 10. EXECUTIVE COMPENSATION............................................ 24
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.... 25
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................... 26
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.................................. 27
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NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION
PART I
ITEM 1. DESCRIPTION OF BUSINESS
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General
North American Gaming and Entertainment Corporation (the "Company") was
incorporated under the laws of the State of Delaware in 1969. The Company
changed its name from Western Natural Gas Company to North American Gaming and
Entertainment Corporation on October 17, 1994 in connection with its merger (the
"Merger") with OM Investors, Inc. ("OM"). Following the Merger, the Company
has concentrated its business in the gaming industry and will continue to pursue
additional opportunities and developments in this industry, as well as in other
industries.
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".
Purported Cash Out Merger of Company's Interests
On March 15, 2000 meetings of the members of OM Operating, L.L.C.
("Operator") and River Port Truck Stop, LLC ("River Port LLC") were called by
Donald I. Williams ("Williams") and The 146, LLC ("146LLC"), the other two
members of Operator and River Port LLC. The purpose of each meeting was to
merge newly-formed limited liability companies owned by Williams and 146LLC into
Operator and River Port and to cancel, or "cash out", the Company's membership
interests in exchange for a cash payment of $375,000 by Operator and $50,000 by
River Port LLC. The Company objected to the holding of the meetings and the
cancellation of its membership interests. The Articles of Organization or the
Operating Agreement of each of Operator and River Port LLC provide that a
member's interest may not be changed and the Articles of Organization may not be
amended without the unanimous vote of all members. Despite the Company's
objections and the requirements of the Articles of Organization, a meeting of
members was held by each of OM and River Port on March 27, 2000 at which
Williams and 146LLC purported to approve both mergers. The Company voted against
the merger at each meeting. The purpose of both mergers was to terminate the
Company's interests in OM and River Port LLC without its consent. A Certificate
of Merger was filed by Operator and River Port LLC with the Secretary of State
of Louisiana on March 28, 2000 purporting to finalize both mergers.
The Company has filed a 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, against Operator, River Port LLC, Williams, 146LLC and Loy
F. Weaver, an affiliate of 146LLC ("Weaver"), for breach of fiduciary duty and
breach of contract, and to declare as a nullity the mergers purportedly approved
by Williams and 146LLC. The Company intends to vigorously pursue its rights,
seek a judicial declaration nullifying the purported mergers of both Operator
and River Port LLC, and seek damages for these and other breaches of fiduciary
duty. A hearing on the Company's motion for preliminary injunction to unwind
the mergers pending final resolution of the case is scheduled for May 11, 2000.
The purported mergers and the pending lawsuit should be considered in the
review of the remainder of this Form 10-KSB. The discussion of Operator and
River Port LLC, and the Company's ownership interests in them, contained in the
remainder of this Form 10-KSB assumes that the purported mergers will be set
aside and that the Company's ownership interests will be reinstated. The final
decision in this regard will not be known until the court renders final judgment
in the lawsuit.
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Sale of Travel Industry Assets
General. The Company entered into a Purchase of Assets Agreement (the
"Purchase Agreement") on October 15, 1999 with Travelbyus.com Ltd.
("Travelbyus"), International Tours, Inc. ("International") and two of the
Company's subsidiaries, GalaxSea Cruises and Tours, Inc. ("GalaxSea") and IT
Cruise, Inc. ("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 (the "Sale") of assets of GalaxSea and the stock of IT Cruise (the "Cruise
Business") closed into escrow on October 15, 1999. The only condition to the
release of escrow and the closing becoming effective was the mailing of an
Information Statement to the stockholders of the Company. Escrow was to be
released and the closing was to become effective 20 days after the first mailing
of such 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 entered into a management
agreement pursuant to which Travelbyus managed the Cruise Business pending the
Effective Date. The Information Statement was mailed on December 23, 1999 and,
therefore, the Effective Date was January 12, 2000.
Assets Sold. The assets sold included 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 sold
did 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, with a stated value under the Purchase Agreement
of $.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. Of the shares received by the Company, 66,667 shares were
transferred to a former officer of GalaxSea and IT Cruise as a bonus and 100,000
shares were transferred to a nonaffiliated entity in satisfaction of a $100,000
advisory fee payable to such entity for assisting the Company in evaluating
Travelbyus, leaving the Company with a net of 500,000 shares of common stock of
Travelbyus. 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.
Shares of Travelbyus Not a Long-Term Investment. The 666,667 shares of
common stock of Travelbyus received by the Company represented approximately
1.3% of the outstanding common stock of Travelbyus as of November 15, 1999. The
Company does not presently intend to hold these shares 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. As of March 1, 2000,
the Company had transferred 166,667 shares as an advisory fee and bonus, as
discussed above, and had sold 175,094 of such shares and continues to hold
324,906 shares. On such date, the closing sale price on the Toronto stock
exchange for Travelbyus common stock was $3.45 (US) per share.
Expenses. The Purchase Agreement provided that each party would 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.
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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 related back to October 1, 1999. Consequently, the transaction was
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 realized a gain from the Sale effective October 1, 1999. The financial
statements included with this Annual Report reflect the Sale of the Cruise
Business as being effective as of October 1, 1999, and the financial statements
for prior periods have been restated to remove the separate segment information
for the Cruise Business operations as discontinued operations. Consequently,
separate segment information, and a separate discussion of the Cruise Business,
is not included in this Annual Report.
Restructure of OM Operating, L.L.C.
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. 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
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 interests (including 50% of its interest in
Operator, River Port 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 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 5,614,632 shares of Common Stock
owned by the North Louisiana Group; (iv) be responsible on a 50/50 basis with
the
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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 River Port LLC; 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. 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 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
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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 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 December 31,
1999, the outstanding principal balance of such indebtedness was approximately
$382,109.
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
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.
Ownership of Ozdon Investments, Inc.
Ozdon Investments, Inc. ("Ozdon") is a Louisiana corporation owned 50% by
the Company and 50% by 146LLC, a Louisiana limited liability company owned by
members of the North Louisiana Group. The Company has not entered into a
shareholders' agreement or similar agreement with the other 50% owner of Ozdon.
Consequently, if the two shareholders cannot agree on various actions, deadlocks
may arise which, if they cannot be satisfactorily resolved otherwise, may
require either shareholder to apply to a court to appoint a receiver or
otherwise intervene to break the deadlock. In the past, the Company has had
difficulties with the other shareholder, or affiliates thereof, resolving
controversial matters. See "Purported Cash Out Merger of Company's Interests",
above, and Item 3--"Legal Proceedings".
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 the commencement of
video poker operations the Additional Rent would be 5% (rather than 10%) and
that commencing with the 25th month
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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 completed the convenience store, fuel facility and
parking lot in January 1999. Construction of the video poker casino was
completed in October 1999 and the casino is expected to open for business in May
2000. 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 May 10, 2000, at which
time all principal and interest must be paid in full, unless the Bank extends
the due date of the note. River Port LLC is negotiating for an extension or
refinancing of the note. 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
is 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 were constructed
has been pledged as collateral for the loan, and the improvements constructed
thereon have also been 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
Ozdon 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, 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. Ozdon 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 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, 1999, Ozdon employed 55 persons in the combined
truck stop and video poker casino operations. Ozdon has granted Operator a
license to handle all sales of alcoholic beverages at the convenience store and
restaurant.
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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 also
agreed to purchase 50 video poker machines to be used in the casino, at a cost
of approximately $282,000. 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, which was assigned by the Company to
Operator concurrently with the Merger with OM, Operator 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
Operator has the option to renew it for three additional five year terms on the
same terms as the original five year period; and Operator is presently in the
first five-year renewal term. However, on October 19, 1995, the Company,
Operator and Curray agreed to co-management of the Pelican Palace whereby
Operator serves 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 operations is split 50%
to Operator and 50% to Curray. However, Operator 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. Operator 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 Operator of $2,500,
plus a percentage of all fuel sales and a percentage of merchandise sales over
$500,000. Consequently, Operator will not employ on site personnel to manage
these operations. Operator will, however, remain primarily responsible for
management of such operations. At December 31, 1999, Operator was operating the
restaurant at the Pelican Palace and employed 35 persons for such operations.
Pursuant to the Settlement Agreement, Operator is 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.
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.
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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 is owned
51% by Williams, 24.5% by the Company and 24.5% by 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.
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 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 December 31, 1999, Operator, through a
month-to-month lease from Ozdon, operates the video poker casino at the Gold
Rush, and Operator operates the video poker casinos at the Pelican Palace and
the Lucky Longhorn truck stops in Louisiana (and until April 1, 1999 and August
17, 1999, operated the King's Lucky Lady and the Diamond Jubilee, respectively,
video poker casinos in Louisiana) and handles all sales of alcoholic beverages
at the convenience store and restaurant at the Gold Rush and the Pelican Palace.
See "Operation of Truck Stop Facilities", above. At December 31, 1999, Operator
employed approximately 40 persons in connection with its casino operations.
Operator generally operates its video poker casinos pursuant to long term
contracts with the owners of the truck stop. River Port LLC will operate the
video poker casino 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 month-to-month lease with Ozdon which may be terminated by either
Ozdon or Operator upon 60 days' prior written notice to the other party.
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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, 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 55 persons in the
combined operations of the Gold Rush truck stop and casino at December 31, 1999.
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 35 persons at the Pelican Palace at December 31, 1999.
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. 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 (32.5% 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. 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. Operator
employed 17 persons at the Lucky Longhorn at December 31, 1999.
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 has built an approximately 3,500 square foot video poker casino
and bar and 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 funded through long-term indebtedness borrowed from Cottonport Bank and
two notes with original principal balances of $250,000 and $1,750,000, which had
a combined outstanding balance of approximately $2,000,000 at December 31, 1999.
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. The River Port video poker casino is scheduled to open for business in
May 2000. It will have 40 video poker devices, and River Port LLC will employ
approximately 15 persons in connection with the operations of the video poker
casino.
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. 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.
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 August 17, 1999, the
date Operator ceased operating the casino) within The Diamond Jubilee truck stop
in east New Orleans, Louisiana.
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Operator operated 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"). 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
Casino Sublease effective August 17, 1999 and no longer operates the Diamond
Jubilee.
Video Poker Tavern Route
Operator also operated three video poker devices in one third-party tavern
as of December 31, 1999 through a subcontract with a nonaffiliated which
provides that Operator is entitled to 30% 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.
Marketing and Competition
Marketing. Ozdon, Operator and River Port LLC market their 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.
Competition. 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 competitors and potential
competitors of Ozdon, Operator and River Port LLC have significantly greater
experience and financial resources than the Company and Ozdon, Operator and
River Port LLC. 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 truck stops
casinos of Ozdon, Operator and River Port LLC are subject to extensive
competition from other truck stops and taverns located within the 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, 1999,
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. Thirteen riverboats were in operation at December 31,
1999, four in Lake Charles (approximately 23 miles from Operator's Lucky
Longhorn and Pelican Palace), three in New Orleans (over 100 miles from any of
the truck stop casinos in which the Company has an interest), three in Bossier
City (over 100 miles from any of the truck stop casinos in which the Company has
an interest), one in Shreveport (over 100 miles from any of the truck stop
casinos in which the Company has an interest), and two in Baton Rouge (over 40
miles from any of the truck stop casinos in which the Company has an interest).
At December 31, 1999, 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 Ozdon, Operator
and River Port LLC have focused their 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 operations of
Ozdon, Operator and River Port LLC 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 Ozdon and
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Operator compete effectively, and that River Port LLC will compete effectively
after its opening in May 2000, with other truck stops and taverns in their
respective market in these areas.
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 those in which the Company has an interest 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
the video poker casinos in which the Company has an interest 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.
Employees
As of December 31, 1999, the Company employed 4 persons full time and part
time. As of December 31, 1999, Ozdon and Operator employed 55 and 52 persons,
respectively, full and part time, including one executive and seven managerial
personnel, with the remainder involved in on-site operation of the four truck
stop casinos. None of the current employees of the Company, Operator or River
Port LLC are covered by any collective bargaining agreements. The Company
considers its employee relations to be good and believes the employee relations
of Ozdon, Operator and River Port LLC to be good, but it has no control over
such employee relations.
Environmental Matters
A number of jurisdictions have adopted laws and regulations relating to
environmental controls and the development and operation of various projects.
Ozdon, Operator and River Port LLC are responsible for complying with various
federal and state waste disposal and licensing laws in connection with the truck
stop facilities they operate, 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 believes
Ozdon, Operator and River Port LLC have obtained all permits required of them,
and is not aware of any material violation of applicable environmental
regulations with respect to the truck stop operations in which it has an
interest. There have been no changes to the Company's operations and no
reserves have been established for any environmental hazards with respect to
such 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
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 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, which operates the Gold Rush, the Lucky Longhorn and the Pelican
Palace Video Poker casinos, has been granted a license as a Device owner by the
Division, and River Port LLC has applied for a license as a Device owner by the
Division for operation of the River Port video poker casino. Prior to
terminating the lease with Operator for the Gold Rush video poker casino, Ozdon
will be required to obtain a license as a Device owner or will be required to
enter into a lease or operating agreement with another person or entity who
maintains a license as a Device owner. 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. The Company believes Operator has
timely submitted its renewal applications, but there is a backlog existing at
the Division and the Division is behind in
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reviewing applications, including the application of Operator. See, also,
"License Renewal Process", above, for a discussion of the renewal examination to
which Operator 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 the failure of River Port LLC to be approved for a license 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 the Company,
Ozdon, 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 and Operator are 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.
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 the Pelican Palace and the Lucky Longhorn.
Ozdon is the Establishment licensee for the Gold Rush. River Port LLC has
applied for the Establishment license 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 all parties deriving a share of gaming revenue), 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 Ozdon or River Port LLC
of their respective Establishment licenses, or the loss of the Establishment
licenses by the Establishment licensees for the Pelican Palace and the Lucky
Longhorn, would have a material adverse effect upon the business of the Company.
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
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truck stops in which the Company has an interest was not in compliance, in which
case their Establishment license could be revoked, which would also result in
the Operator or River Port LLC, as applicable, losing its ability to operate the
video poker truck stop casino at such truck stop. The Company has reviewed
arrangements between the Establishment Licensees and the fuel operators at the
existing truck stops in which the Company has an interest 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 such 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 strict compliance with the parking area
requirements 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, 1999, each of Gold Rush, Luck Longhorn, Pelican
Palace and River Port Truck Stops satisfied 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 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, 1999, the
truck stop facilities at the Gold Rush, Lucky Longhorn and Pelican Palace
satisfied the fuel sales necessary to allow the operation of the maximum number
of 50 devices. The truck stock facility at River Port has current fuel sales
sufficient to allow a maximum of 40 video poker devices. 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 any of the truck stop casinos in which the Company has an
interest 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, 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 video poker
casinos were operated in which the Company had an interest voted to continue
truck stop video poker, but two parishes voted to discontinue video poker
casinos which will result in the closure of various taverns and the loss of
various video poker devices. 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.
-13-
<PAGE>
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. River Port LLC submitted its license application to
the Attorney General's office on March 29, 2000 and is awaiting communication
from the Attorney General and the Gaming Control Board.
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 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, and River Port LLC will be required to file,
annually with the United States Department of Justice under the Gambling Devices
Act of 1962. The Company believes all currently required filings have been made
although it has no control over such annual filing compliance.
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 or to be held by Ozdon, 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
-14-
<PAGE>
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.
ITEM 2. DESCRIPTION OF PROPERTY
- --------------------------------
Ozdon 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 $382,109 at December 31, 1999, 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" 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 Operator operates and
manages the Pelican Palace truck stop facility and operates the truck stop video
poker casinos at the Gold Rush, Pelican Palace and Lucky Longhorn, and a
description of the River Port lease, is also included under Item 1--"Description
of Business -- Development of River Port Truck Stop", "--Operation of Truck Stop
Facilities" 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
$5,090 per month. Until the Sale of the Cruise Business, the Company subleased
approximately 2,015 square feet of its office space to International for $1,595
per month pursuant to a month to month verbal agreement. The Company presently
has more office space than it needs and is attempting to sublease or assign a
portion of the premises to a nonaffiliated party.
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 received $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 represented a suit for declaratory
judgment by former holders of Class A Preferred
-15-
<PAGE>
Stock seeking to have the court order that accrued dividends thereon must be
paid. This suit was dismissed with prejudice by the plaintiffs in connection
with the consummation of the Settlement Agreement.
Arlington Farms, Inc., et al v. North American Gaming and Entertainment
Corporation, et al, Civil Action No. 00-106-C-M2, United States District Court,
Middle District of Louisiana. This suit represents a suit by certain of the
plaintiffs in the Harry Woodall, et al v. North American Gaming and
Entertainment Corporation lawsuit which was dismissed as part of the Settlement
Agreement with the North Louisiana Group. These plaintiffs have sued the
Company seeking specific performance under the Settlement Agreement to require
the Company, among other things, to deliver various instruments of ownership
reflecting the ownership interests of the North Louisiana Group in Operator,
River Port LLC and Ozdon and to declare that the effective date of the transfer
was December 17, 1998 rather than March 31, 1999, and for unspecified damages
allegedly caused by the delay of the Company in delivering such ownership
interests and unspecified damages allegedly caused for unspecified violations of
Rule 10b-5 promulgated under the Securities Act of 1933. The Company intends to
file an answer on or before April 7, 2000. The Company intends to vigorously
defend any claims for damages and to require the members of the North Louisiana
Group to deliver to the Company all instruments required to be delivered under
the Settlement Agreement. The suit also involves a claim against E.H. Hawes,
II, the President and Chief Executive Officer of the Company, and a
nonaffiliated third party to set aside a second lien on the Gold Rush granted by
the Company to secure the personal guaranty of Mr. Hawes and such third party
guaranteeing the indebtedness of River Port LLC incurred in connection with the
construction of River Port.
See Item 1 -- "Description of Business - Purported Cash Out Merger of
Company's Interests" for a discussion of an additional pending legal litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
The Company mailed an Information Statement to it stockholders on or around
December 23, 1999 pursuant to which the stockholders were informed that the Sale
of the Cruise Business had been approved by written consent of five stockholders
owning approximately 62.2% of the outstanding shares of Common Stock. Pursuant
to the terms of the Purchase Agreement with Travelbyus, the Sale of the Cruise
Business closed January 12, 2000, twenty days after the mailing of such
Information Statement, with an effective date of October 1, 1999.
[This Space Intentionally Left Blank]
-16-
<PAGE>
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.
<TABLE>
<CAPTION>
Calendar Years Bid Price
by Quarter --------------
-------------- High Low
--------------
<S> <C> <C> <C>
1999 First $1/20 $1/32
Second 1/16 1/32
Third 1/25 1/32
Fourth 1/25 1/25
1998 First $1/32 $1/32
Second 3/16 1/32
Third 1/10 1/16
Fourth 1/16 1/20
</TABLE>
At December 31, 1999, the Company had approximately 3,146 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 its former outstanding Class A Preferred Stock. From October 17,
1994 through May 31, 1996, the former 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 $447,018 in
arrears on dividends on its former outstanding Class A Preferred Stock as of
December 31, 1999. These dividends will accumulate and be payable in full prior
to any distributions on the Common Stock. All shares of Class A Preferred Stock
were converted into Common Stock during 1998 and there are no outstanding shares
of Class A Preferred Stock and no continuing accrual of dividends upon Class A
Preferred Stock.
The Company used $1,000,223 from the proceeds of the Sale of the Cruise
Business to pay past due principal and accrued interest on the promissory note
payable by the Company to International. As of April 6, 2000, the Company is in
arrears a total of approximately $10,000 in principal to International under the
note. The note had an original principal balance of $1,400,000 and requires
monthly payments of principal and interest of $50,000. Until such time as the
International note is paid in full, 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 had aggregate remaining
principal balances of $514,067 and accrued interest of $126,905 at December 31,
1999, and require aggregate payments of principal and interest of approximately
$9,500 per month until paid in full. 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.
-17-
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
- ------------------------------------------------------------------
Liquidity and Capital Resources
Present Cash Shortfall. As of April 6, 2000, the Company was in arrears a
total of approximately $10,000 on the promissory note payable to International
by the Company. The note had an original principal balance of $1,400,000 and
requires monthly payments of principal and interest of $50,000.
Until such time as the International note is paid in full, 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 had aggregate remaining principal balances of $514,067 and accrued
interest of $126,905 at December 31, 1999. These debentures require aggregate
payments of principal and interest of approximately $9,500 per month until paid
in full and are expressly made subordinate to the International note as well as
other senior debt of the Company. The Company plans to enter into negotiations
with 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, the restructuring of the Company's ownership,
revenue and profits interests in the Operator, River Port LLC and Ozdon, and any
loss of 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
2000, but there can be no assurance. If not, it is possible that the Company
might continue to experience certain cash shortfalls in 2000, 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.
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 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 1999 with $248,491 in cash and
other current assets amounting to $1,766,818, including accounts receivable
(net) of $110,843 and investments in 666,667 shares of Travelbyus common stock
with a value of $1,654,101 (of which 166,667 shares, or $194,101, is restricted
for payment of a bonus and an advisory fee in connection with the sale of the
Cruise Business). At March 1, 2000, the Company continued to own 324,906 shares
of common stock of Travelbyus. On that date, the closing sale price for a share
of common stock of Travelbyus on the Toronto Stock Exchange was $3.45 (US).
Total liabilities were $1,797,081 at December 31, 1999, including accounts
payable and accrued liabilities of $471,557, long-term notes payable of $781,369
and preferred stock dividends payable of $447,018. The Company also reflected a
deferred tax liability of $97,137. The Company's
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<PAGE>
liabilities decreased $4,672,347 from $6,469,428 at December 31, 1998 to
$1,797,081 at December 31, 1999. This decrease was comprised primarily at a
decrease in accounts payable, dividends payable, subordinated debentures and
long-term debt due to the restructure of Operator, River Port LLC and Ozdon
effective April 1, 1999. In addition, the Company paid approximately $915,000 on
long-term debt, including the International note.
Intense competition for the business of gaming patrons in Louisiana and
Mississippi resulted in a decline in operating profit margins during 1999. 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 Ozdon, the
Operator and River Port LLC will be able to maintain a competitive position if
they are able to carefully managing expenses and cash flow. However, there can
be no assurance in this regard and the Company has no control over such
management.
Results of Operations
The Company's continuing operations resulted in income before taxes of
$401,734 for the year ended December 31, 1999, an increase of $165,807 or 70%
from income before taxes of $235,927 for the year ended December 31, 1998. The
increase is primarily a result of a gain on sale of certain interests in its
gaming operations (see Note 2 to the consolidated financial statements) and
other assets of approximately $634,000 and a decline in interest and other non-
operating expenses, offset by a decline in income from operations of $784,029.
Income from operations was $318,836 (including $275,769 of income from its
equity investments in gaming operations) for the year ended December 31, 1999,
down from $1,102,865 for the year ended December 31, 1998.
In addition, the Company recorded a loss from its cruise operations of
$(184,531) in 1999 compared to a loss of $(404,698) in 1998. The decrease in
the loss is due to the Company selling the cruise operations effective October
1, 1999 so there was a decreased operating period in 1999 and the Company
reduced marketing and promotional costs in 1999.
The Company recorded a gain on the Sale of the Cruise Business of
$1,130,589, net of $297,434 of selling costs, in 1999. There was no such gain
in 1998.
Net income for the year ended December 31, 1999 was $1,302,792, an increase
of 613% from the net loss of $(253,750) realized for the year ended December 31,
1998. The primary reasons for the increase are discussed above.
The following comparisons are based on the operational results of the
Company and include certain operational information from April 1, 1999 to
December 31, 1999 of the gaming entities in which the Company holds an equity
investment. This presentation is used to provide comparable video poker and
retail operating results for the year ended December 31, 1999 to 1998.
The following is unaudited financial information of Operator, River Port
LLC and Ozdon (collectively "OM and Related Entities").
-19-
<PAGE>
OM AND RELATED ENTITIES
SELECTED COMBINED OPERATING INFORMATION
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Nine Months Year Ended
Ended March Ended December December
31, 1999 31, 1999 31, 1999
------------ -------------- -----------
<S> <C> <C> <C>
Revenues:
Video Poker $4,128,171 $ 8,874,471 $13,002,642
Truck stop and
convenience store 1,905,456 4,207,479 6,112,935
---------- ----------- -----------
$6,033,627 $13,081,950 $19,115,577
========== =========== ===========
Costs of Revenue:
Video Poker $2,375,965 $ 4,893,709 $ 7,269,674
Truck stop and
convenience store 1,568,287 3,517,533 5,085,820
---------- ----------- -----------
$3,944,252 $ 8,411,242 $12,355,494
========== =========== ===========
</TABLE>
Revenues totaled $19,115,577 through December 31, 1999 compared to
$24,383,294 for 1998, down 22% (including approximately $13,081,950 of revenue
generated by OM and Related Entities during the nine months from April 1, 1999
to December 31, 1999, which is included in the income from equity investments
for the same period in the accompanying consolidated financial statements).
Video Poker revenues totaled $13,002,642 through December 31, 1999, down
$2,701,589, or 17% from 1998's $15,704,231. The primary reason for the loss in
revenues is due to the discontinuation of operations at King's Lucky Lady in
Port Barre, Louisiana, a decline of revenues of approximately $1,900,000, and
Diamond Jubilee in New Orleans, Louisiana a decline in revenues of approximately
$837,000. Revenue increases were achieved at the Pelican Palace of
approximately $229,000 and at the Gold Rush of $193,000 and a revenue decrease
of approximately $287,000 was realized at the Lucky Longhorn.
Retail revenues from fuel and convenience store, food and beverage operations
amounted to $6,112,935 for the year ended December 31, 1999, compared to 1998's
$8,679,063, a decrease of 30%. The loss of the King's Lucky Lady Truck Stop and
convenience store in early 1999 resulted in a decrease of approximately
$2,267,000 in revenues. Revenues increased approximately $368,000 at the Diamond
Jubilee as it was in operation eight months in 1999 and four months in 1998.
River Port truck stop revenues were down approximately $943,000 as the store was
closed in December 1998 for reconstruction and when it reopened in 1999, was
operated by a third party. River Port LLC received rental income and other fees
from the operator in 1999. All other retail locations were up approximately
$276,000.
Cost of revenues totaled $12,355,494 through December 31, 1999 compared to
$16,221,408 for 1998, down 24% (including approximately $8,411,242 of costs of
revenue generated by OM and Related Entities during the nine months ended
December 31, 1999, which is included in the income from equity investments for
the same period in the accompanying financial statements).
Video poker operations recorded a direct cost of revenue of $7,269,674 in 1999
and $9,091,113 in 1998, a decrease of 20%. The primary reason for the decrease
in total dollars was a direct result of the decline in revenues generated as
discussed above. As a percentage of video poker revenue, video poker costs
decreased to 56% from 58% of revenues as a result of a decline in depreciation
expense of approximately $166,000 as video poker assets become fully
depreciated. Profit sharing distributions and state fees remained comparable.
Retail operations (fuel, convenience store, food and beverage) recorded cost of
revenue of $5,085,820 for the year ended December 31, 1999 compared to
$7,130,295 for 1998, a decrease of $2,044,475, or 29%, due to discontinued
operations at King's Lucky Lady truck stop as of March 31, 1999 and the fact
that in 1998 Ozdon operated the River
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<PAGE>
Port truck stop and in 1999, when reopened, a third party operated the River
Port truck stop and paid Ozdon rent. As a percentage of retail revenues, total
cost of revenues increased to 83% from 82%.
In order to comply with State regulations governing truck stops, OM and
Related Entities continued to be very competitive in the marketing and pricing
of fuel during the year ended December 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.
General operating and administrative expenses were $2,046,308 in 1999 and
$7,059,021 in 1998, a decline of $5,012,713, or 71%, due to the change in
ownership of the gaming operations at March 31, 1999. The Company's portion of
general and administrative expenses related to OM, River Port LLC and Ozdon from
April 1,1999 to December 31, 1999 is included in income from equity investments
in the consolidated statement of operations. General and administrative
expenses represented 34% and 29% of total revenue for 1999 and 1998,
respectively. The increase as a percent of revenue is a result of a decline in
revenue due to the change in ownership of the gaming operations along with an
increase in corporate overhead for consulting costs.
Other income (expenses) totaled $358,667 through December 31, 1999, compared to
$(866,938), up 141%.
Depreciation and amortization amounted to $320,887 for the year ended December
31, 1999 and $630,994 in 1998. The decrease is due to the change in ownership of
the gaming operations and the decline in goodwill amortization upon the sale of
IT Cruise effective October 1, 1999.
Interest expense was $193,340 in 1999 and $306,352 in 1998. The decrease is
attributable to debt on the Gold Rush property and River Port construction that
was consolidated through March 31, 1999 and is included in income from equity
investment for the Company's ownership percentage from April 1, 1999 to December
31, 1999.
Net other expense was $(357,733) in 1999, compared to $(486,610) in 1998. The
decrease is due to the decrease in the reserve of King's Lucky Lady operating
revenue through March 31, 1999 when a settlement was reached. The Company had
been reserving 100% of the income generated by King's Lucky Lady since March 3,
1998.
Income from equity investments in the amount of $275,769 was recorded beginning
April 1, 1999, representing the Company's share of net income/loss in gaming and
truck stop operations (see Note 2 to the consolidated financial statements).
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 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-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
-21-
<PAGE>
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.
-22-
<PAGE>
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 1, 2000, with respect
to each of the Company's directors and each executive officer:
<TABLE>
<CAPTION>
Served as Executive
Officer or
Name Age Position Director Since
- ---------------------------- --- ---------------------- -------------------
Directors and Executive Officers
<S> <C> <C> <C>
E.H. Hawes, II 60 Director (Chairman), 1998
President and Chief
Executive Officer
Daryl N. Snadon/(1)/ 54 Director 1994
Richard P. Crane, Jr. 60 Director and Secretary 1994
</TABLE>
_______________
(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.
During 1999, the Board of Directors held six meetings, and took six
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.
-23-
<PAGE>
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
1999.
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. Messrs. Crane and Snadon were each granted options on January 20,
2000 to purchase 1,000,000 shares of Common Stock at an exercise price of
$.03125 per share, the approximate fair market value on such date, with such
options vesting immediately and having a term of five years from the date of
grant.
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 1999.
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, 1999, 1998 and
1997, 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, 1999. No other executive officer of the Company received
remuneration in excess of $100,000 during 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Annual Compensation-
Name and Compensation Securities All
Principal -------------------- Underlying Other
Position Year Salary Bonus Options or Warrants Compensation
- ------------------------------ ----- ------ ----- ------------------- ------------
<S> <C> <C> <C> <C> <C>
E. H. Hawes, II, 1999 $ - $ - - $190,000/(1)/
Chief Executive 1998 - - - 63,125/(1)/
Officer 1997 - - - 37,500/(1)/
</TABLE>
___________________
(1) Represents consulting fees paid by the Company.
Option/SAR Grant Table
(Option/Warrant/SAR Grants in Last Fiscal Year)
<TABLE>
<CAPTION>
Number of
Securities Percent of
Underlying Total
Options or Option/Warrant Market Price
Warrants Granted to Exercise or on Date
Granted Employees in Base Price of Grant Expiration
Name # Fiscal Year ($/Sh) ($/Sh) Date
- ----------------- ---------- -------------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C>
E. H. Hawes, II - - $ - $ - -
</TABLE>
-24-
<PAGE>
Aggregated Option/Warrant/SAR Exercises in Last Fiscal
Year and FY-End Option/SAR Values
<TABLE>
<CAPTION>
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 # $ # $
- ----------------- --------- -------- ---------------------- -----------------
<S> <C> <C> <C> <C>
E. H. Hawes, II None None - $ -
</TABLE>
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 1, 2000, 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)/ 18,079,286 54.6
13150 Coit Road
Suite 125
Dallas, Texas 75240
Hawes Partners/(1)/ 18,079,286 54.6
Shangri-La Vista Tower
Route 3
Afton, Oklahoma 74331
E.H. Hawes, II/(1)/ 18,081,620 54.6
Shangri-La Vista Tower
Route 3
Afton, Oklahoma 74331
Lamar E. Ozley, Jr./(2)/ 2,054,329 6.2
6306 Mill Point Circle
Dallas, Texas 75248
D.W. Morton, Ltd./(3)/ 2,454,354 7.4
Delwin W. Morton
Brevely G. Morton
777 #. 15th Street
Plano, Texas 75074
Daryl N. Snadon/(4)/ 1,535,666 4.5
15280 Addison Rd., Ste 300
Dallas, Texas 75248
Richard P. Crane, Jr./(5)/ 1,785,556 5.2
530 Wilshire Blvd., Ste. 400
Santa Monica, California 90401
All Executive Officers and 21,402,842 60.1
Directors as a Group
(3 persons)/(1)(4)(5)/
</TABLE>
-25-
<PAGE>
- -----------------
(1) International Tours, Inc. ("International") owns 18,079,286 shares of
Common Stock of record and beneficially. E. H. Hawes, II, owns of record
and beneficially 2,334 shares of Common Stock. Hawes Partners is a
partnership owned 100% owned by Mr. Hawes. Hawes Partners beneficially
owns 100% of the outstanding capital stock of International. Consequently,
the 18,079,286 shares of Common Stock owned of record and beneficially by
International may also be deemed to be beneficially owned by each of Hawes
Partners and Mr. Hawes, and are reflected accordingly in the table above
for their respective ownership positions.
(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) 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.
(4) Includes a vested option to acquire 1,000,000 shares and 535,666 shares
pledged as collateral on a note payable to Mr. Snadon's former wife.
(5) Includes vested options to acquire 1,500,000 shares.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -----------------------------------------------------------
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 1999 and 1998, the Company paid approximately $79,000 and
$38,000, respectively, in salary and employee reimbursements to International,
and International paid $22,095 in rent to the Company during 1999 and $19,100
during 1998.
Guarantees of Indebtedness of River Port LLC. The Company has guaranteed
all of the $2.0 million 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.
Consulting Fees. 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. Mr. Hawes has
continued to provide consulting services to the Company and was paid $190,000
and $63,125 in consulting fees during 1999 and 1998, respectively. The Company
has agreed to pay Mr. Hawes $200,000 during fiscal 2000 for consulting services
and expense reimbursements.
International Note. As discussed under Item 5--"Market for Common Equity
and Related Stockholder Matters" and Item 6--"Management's Discussion and
Analysis or Plan of Operation", the Company paid International $725,223 in 1999
and $275,000 in 2000 pursuant to a promissory note in the original principal
amount of $1,400,000, and the Company is in arrears in the amount of
approximately $10,000 at April 6, 2000.
-26-
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
- -------------------------------------------
(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.
-27-
<PAGE>
Exhibit
Number Description of Exhibits
------ -----------------------
10.1.1 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.
10.1.2 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.
10.1.3 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.
10.1.4 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.
10.1.5 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.
10.1.6 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.
10.1.7 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.
10.1.8 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.
10.2.1 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.
10.2.2 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.
10.3.1 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.
10.3.2 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.
-28-
<PAGE>
Exhibit
Number Description of Exhibits
------ -----------------------
10.3.3 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.
10.3.4 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.
10.3.5 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.
10.3.6 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.
10.4.1 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.
10.4.2 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.
10.5 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.
10.6 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.
10.7.1 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.
10.7.2 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.
10.7.3 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.
-29-
<PAGE>
Exhibit
Number Description of Exhibits
------ -----------------------
10.8 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.
10.9.1 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.
10.9.2 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.
10.9.3 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.
10.9.4 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.
10.9.5 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.
10.9.6 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.
10.9.7 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.
10.10.1 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.
10.11 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.
10.12 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.
-30-
<PAGE>
Exhibit
Number Description of Exhibits
------ -----------------------
10.13 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.
10.14 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.
10.15 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.
10.16 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.
10.17 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.
10.18 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.
10.19 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.
10.20 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.
10.21 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.
10.22 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.
10.23 Convenience Store and Restaurant Sub-Lease dated January 10,
1999 between RVC Operations, L.L.C. and River Port Truck
Stop, LLC filed as Exhibit 10.41 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31,
1998 and incorporated herein by reference.
-31-
<PAGE>
Exhibit
Number Description of Exhibits
------ -----------------------
10.24 Fuel Service and Truck Stop Operating Agreement dated
January 10, 1999 between RVC Operations, L.L.C. and River
Port Truck Stop, LLC filed as Exhibit 10.42 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1998 and incorporated herein by reference.
*10.25 Purchase of Assets Agreement dated October 13, 1999 relating
to the Sale of the Cruise Business.
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
None.
-32-
<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 14, 2000 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 14, 2000 /s/ E. H. Hawes, II
--------------------------------------------
E.H. Hawes, II
Director (Chairman)
April 14, 2000 /s/ Daryl N. Snadon
--------------------------------------------
Daryl N. Snadon
Director
April 14, 2000 /s/ Richard P. Crane, Jr.
--------------------------------------------
Richard P. Crane, Jr.
Director
-33-
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
===============================================================================
Financial Statements of North American Gaming and
Entertainment Corporation and Subisidiaries
Page
---------
Independent Auditors' Report F-2
Financial Statements:
Consolidated Balance Sheet - December 31,1999 F-3
Consolidated Statements Of Operations - Years Ended
December 31, 1999 And 1998 F-4-F-5
Consolidated Statements Of Comprehensive Income (Loss) -
Years Ended December 31, 1999 And 1998 F-6
Consolidated Statements Of Stockholders' Equity (Deficit) -
Years Ended December 31,1999 And 1998 F-7
Consolidated Statements Of Cash Flows - Years Ended
December 31, 1999 And 1998 F-8-F-9
Notes To Consolidated Financial Statements F-10-F-27
Unaudited Financial Statements of OM and Related Entities
Introduction to Unaudited Financial Statements F-28
Financial Statements:
Combined Balance Sheet - December 31,1999 F-29
Combined Statement Of Operations And Equity -
Year Ended December 31, 1999 F-30
Combined Statement Of Cash Flows - Year Ended
December 31, 1999 F-31
Notes To Combined Financial Statements F-32-F-40
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, 1999, and the related consolidated statements of operations,
comprehensive income (loss), stockholders' equity (deficit) and cash flows for
the years ended December 31, 1999 and 1998. 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 audits.
We conducted our audits 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 audits
provide 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, 1999, and the results of their operations and their cash flows for the years
ended December 31, 1999 and 1998 in conformity with generally accepted
accounting principles.
/s/ Sartin Fischbein & Co.
March 2, 2000, except for Notes 2, 8, and 9
which the date is April 6, 2000
Tulsa, Oklahoma
F-2
<PAGE>
<TABLE>
<CAPTION>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
======================================================================================================
December 31, 1999
- ------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Current Assets:
Cash $ 248,491
Accounts receivable, net of allowance for doubtful accounts of $32,206 110,843
Investment in available-for-sale securities 1,460,000
Investments - restricted 194,101
Prepaid expenses 1,874
-----------
Total Current Assets 2,015,309
-----------
Furniture And Equipment, net of accumulated depreciation 21,309
-----------
Other Assets:
Deposits 3,246
Investments - other 382,479
-----------
Total Other Assets 385,725
-----------
Total Assets $ 2,422,343
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 471,557
Deferred tax liability 97,137
Preferred stock dividends payable 447,018
-----------
Total Current Liabilities 1,015,712
Notes Payable - long-term 781,369
-----------
Total Liabilities 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
Additional paid-in capital 466,959
Treasury stock, 8,667,632 shares, at cost (111,676)
Accumulated other comprehensive income 548,562
Accumulated deficit (696,469)
-----------
625,262
-----------
Total Liabilities and Stockholders' Equity $ 2,422,343
===========
</TABLE>
F-3
================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
======================================================================================================
Years Ended December 31, 1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue:
Video poker $4,128,171 $15,704,231
Truck stop and convenience store 1,905,456 8,679,063
---------- -----------
6,033,627 24,383,294
---------- -----------
Costs And Expenses:
Video poker:
Cost of revenue 2,330,478 8,871,204
Depreciation and amortization 45,487 219,909
---------- -----------
2,375,965 9,091,113
---------- -----------
Truck Stop and Convenience Store:
Cost of revenue 1,553,077 7,065,399
Depreciation and amortization 15,210 64,896
---------- -----------
1,568,287 7,130,295
---------- -----------
General and administrative 2,036,040 7,045,782
Depreciation and amortization 10,268 13,239
---------- -----------
Operating Income 43,067 1,102,865
Interest Expense (193,340) (306,352)
Gain (Loss) on Sale of Assets 633,971 (73,976)
Income from Equity Investments 275,769 -
Other Expense (357,733) (486,610)
---------- -----------
Income Before Provision For Income Taxes 401,734 235,927
Provision For Income Taxes (45,000) (84,979)
---------- -----------
Income from Continuing Operations 356,734 150,948
Discontinued Operations:
Loss from operations of cruise operations
disposed of net of income tax expense (benefit)
of $33,000 (1999) and $(45,000) (1998) (184,531) (404,698)
Gain on disposal of cruise operations, net of
selling costs of $297,434 and income taxes
of $109,000 (1999) 1,130,589 -
---------- -----------
Net Income (Loss) $1,302,792 $ (253,750)
========== ===========
</TABLE>
F-4
===============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIE
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED
======================================================================================================
Years Ended December 31, 1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Earnings Per Share:
Basic:
Income from continuing operations $ 0.01 $ *
Loss from discontinued operations (0.01) (0.01)
Gain on disposal of cruise operations 0.03 *
----------- -----------
Net income (loss) $ 0.03 $ $(0.01)
=========== ===========
Basic Weighted Average Shares Outstanding 41,788,552 31,980,331
=========== ===========
* Less than $0.01 per share.
</TABLE>
F-5
===============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
======================================================================================================
Years Ended December 31, 1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Income (Loss) $1,302,792 $(253,750)
---------- ----------
Other Comprehensive Income:
Unrealized gains on available-for-sale securities
net of deferred income tax expense of $329,137 548,562 -
---------- ----------
548,562 -
---------- ----------
Total Comprehensive Income (Loss) $1,851,354 $(253,750)
========== ==========
</TABLE>
F-6
===============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
===================================================================================================================================
Years Ended December 31, 1999 and 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Additional Accumulated Total
Class A Preferred Paid-in Other Stockholders'
Preferred Stock Common Capital Treasury Comprehensive Accumulated Equity
Stock Series "B" Stock (Deficit) Stock Income Deficit (Deficit)
---------- ---------- -------- ------------ ------- ------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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)
Redemption of 8,167,632 shares
of stock at $.01 per share
- - - - (81,676) - - (81,676)
Purchase of 500,000 shares
of stock at $.06 per share - - - - (30,000) - - (30,000)
Other comprehensive
income - - - - - 548,562 - 548,562
Net income - 1999 - - - - - - 1,302,792 1,302,792
----------- --------- -------- ----------- --------- -------- --------- -----------
Balance, December 31, 1999 $ - $ - $417,886 $ 466,959 $(111,676) $548,562 $(696,469) $ 625,262
=========== ========= ======== =========== ========= ======== ========= ===========
</TABLE>
F-7
================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
========================================================================================
Years Ended December 31, 1999 1998
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ 1,302,792 $ (253,750)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization 320,887 630,994
Deferred tax expense 176,000 39,978
Income from equity investments (275,769) -
Gain on sale of an interest in gaming operations (673,579) -
Gain on sale of cruise operations (1,537,023) -
Loss on disposal of assets 39,608 73,976
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (27,026) 72,260
Inventories (11,027) 12,685
Prepaid expenses 34,966 29,891
Deposits 14,253 33,959
Increase (decrease) in:
Accounts payable and accrued liabilities 185,347 180,144
----------- -----------
Net Cash Provided By (Used In) Operating Activities (450,571) 820,137
----------- -----------
Cash Flows From Investing Activities:
Purchases of property, plant and equipment (58,724) (123,292)
Cash sold in sale of assets (304,286) -
Proceeds from sale of assets 1,701,759 -
Repayments by borrowers 47,666 1,866
Net capital contribution to equity investments (14,137) -
Purchase of intangibles - (7,410)
Cash and restricted cash transferred under
contractual agreement - (292,582)
Construction of casino and truck stop (8,500) (1,604,923)
----------- -----------
Net Cash Provided By (Used In) Investing Activities 1,363,778 (2,026,341)
----------- -----------
Cash Flows From Financing Activities:
Purchase of treasury stock (30,000) -
Proceeds from borrowings - 1,465,409
Payments on borrowings (915,825) (593,808)
----------- -----------
Net Cash Provided By (Used In) Financing Activities (945,825) 871,601
----------- -----------
Net Decrease In Cash (32,618) (334,603)
Cash, beginning of year 281,109 615,712
----------- -----------
Cash, end of year $ 248,491 $ 281,109
=========== ===========
</TABLE>
F-8
================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
======================================================================================
Years Ended December 31, 1999 1998
- --------------------------------------------------------------------------------------
<S> <C> <C>
Cash Paid During The Year For:
Income taxes, net of refunds received $ 22,000 $ 107,550
Interest $ 237,436 $ 204,440
Non-Cash Investing and Financing Activities:
Conversion of Class A Preferred Stock to
common stock $ - $ 3,861,000
========== ===========
Conversion of Class B Preferred Stock to
common stock $ - $ 80,000
========== ===========
Issuance of common stock under anti-dilutive
provision $ - $ 54,529
========== ===========
Redemption of common stock, cancellation
of debt, dividends and accrued interest
and receipt of marketable equity securities
in connection with the sale of assets $1,642,149 $ -
========== ===========
Unrealized gain on available for sale securities,
net of deferred income taxes $ 548,562 $ -
========== ===========
</TABLE>
F-9
===============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
================================================================================
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, GalaxSea Cruises and Tours, Inc. ("Galaxsea"),
I.T. Cruise, Inc. ("IT"), and River Port Truck Stop, Inc. (RPI), (collectively
the Company). Through March 31, 1999, the consolidated financial statements
also included the accounts of OM Operating, LLC (OM), River Port Truck Stock,
LLC (RPLLC) and Ozdon Investments, Inc. (Ozdon) (see Note 2). The operating
agreements of OM and RPLLC state the Companies will terminate no later than
December 31, 2050. All significant intercompany balances and transactions have
been eliminated in consolidation.
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 through December 31, 1999, the
Company received income from its equity investments in OM, RPLLC and Ozdon
(which owns the facility known as the Gold Rush Truck Stop), which operated four
video poker casinos and one bar operation. The Company also operated in the
cruise travel business, through September 30, 1999, when it sold its operations
(see Note 3).
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,
- ------------------
1998 consolidated financial information in order to conform to the 1999
presentation. The reclassifications had the following effect on the 1998 net
loss:
<TABLE>
<CAPTION>
As Previously Reclass- Adjusted
Reported ification December 31, 1998
------------------ ---------------- ------------------------
<S> <C> <C> <C>
Income (loss) from continuing operations $(253,750) $ 404,698 $ 150,948
Loss from operations of discontinued segment, net - (404,698) (404,698)
--------- --------- ---------
Net Loss $(253,570) $ - $(253,750)
========= ========= =========
</TABLE>
Video Poker Revenue: Video poker revenue is the net revenue from gaming
- --------------------
activities, defined as the difference between gaming wins and losses.
F-10
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
================================================================================
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Investment Securities: Investment securities that are held for short-term
- ----------------------
resale are classified as trading securities and carried at fair value. Other
marketable securities are classified as available-for-sale and are carried at
fair value. Unrealized gains and losses on securities available-for-sale are
reported net of income taxes in accumulated other comprehensive income. Cost of
securities sold is recognized using the specific identification method. Equity
securities, whose trade is restricted, are carried at cost.
Furniture and Equipment: Expenditures for furniture 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 7.5 years, using an accelerated method for financial accounting
purposes.
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.
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 RPLLC are not subject to income taxes. Income or
loss is required to be included in the income tax returns of the members.
Concentration: Video poker revenue represents approximately 64% of the
- --------------
Company's operating revenue for the year ended December 31, 1998. During the
year ended December 31, 1999, video poker revenues represent approximately 68%
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 9).
F-11
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
================================================================================
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
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 all potential common shares are anti-dilutive.
Fair Value of Financial Instruments: The carrying amounts of financial
- ------------------------------------
instruments including cash, receivables, prepaids, accounts payable and accrued
expenses approximated fair value as of December 31, 1999 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, 1999 because interest rates on these instruments approximate
market interest rates.
Recently Issued Accounting Pronouncements: In June of 1998, the FASB issued
- ------------------------------------------
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133). SFAS No. 133 addresses the
accounting for derivative instruments embedded in other contracts and hedging
activities. SFAS No. 133 is effective for all fiscal quarters of all fiscal
years beginning after June 15, 1999. Initial application of SFAS No. 133 shall
be as of the beginning of an entity's fiscal quarter, on that date, hedging
relationships shall be designated and documented under the provisions of this
statement. This statement currently has no impact on the financial statements
of the Company, as the Company does not hold any derivative instruments or
participate in any hedging activities.
2. MINORITY INTERESTS
OM Operating L.L.C. (OM): In 1994 the Company contributed to OM 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
OM 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.
F-12
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
================================================================================
2. MINORITY INTERESTS (CONTINUED)
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 had the 20% gross income allocation and
Williams owed the Company $4,000,000 pursuant to the Note. The Note was 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 was 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
was automatically reduced pro-rata (at percentages agreed upon based on 1997 net
operating income of each of the five locations) if OM lost the right to operate
any of the five locations.
Until the Note was paid in full, the Company had the right to remove and appoint
a new manager of OM 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 had been paid in full, the manager would 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 11) 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
11).
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 11).
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.
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, and for the period from January 1, 1999 to
March 31, 1999. The principal balance outstanding on the Note at December 31,
1998 and March 31, 1999 remained at $4,000,000.
F-13
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
================================================================================
2. MINORITY INTERESTS (CONTINUED)
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
made on the Note.
River Port Truck Stop,LLC (RPLLC): During 1998, 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 11)
pursuant to which the Company would receive a fee of $50,000 per year.
Additionally, Williams, RPLLC and OM also entered into an Amendment to the
Employment Agreement (see Note 11) pursuant to which Williams agreed to perform
the same services for RPLLC as he performed for OM under the Employment
Agreement and pursuant to which OM and RPLLC agreed 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 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 was 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 and for the period from January
1, 1999 to March 31, 1999.
F-14
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
================================================================================
2. MINORITY INTERESTS (CONTINUED)
Restructure of OM and RPLLC: In order to respond to additional concerns of the
- ----------------------------
Louisiana gaming regulators (see Note 9) 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 effectively canceled 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 Ozdon) 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 Ozdon were as follows:
Former
Company Stockholders 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%
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 began recording its investment in OM, RPLLC and
Ozdon (collectively referred to as the "Operator" from April 1, 1999 to December
31, 1999) under the equity method.
The Company's investment in the equity of OM, RPLLC and Ozdon are as follows at
December 31, 1999:
OM $271,978
RPLLC (36,477)
Ozdon 146,978
---------
$382,479
========
F-15
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
================================================================================
2. MINORITY INTERESTS (CONTINUED)
The following is a condensed unaudited combined balance sheet for OM, RPLLC and
Ozdon as of December 31, 1999 and the condensed unaudited, combined statement of
income for the year then ended.
CONDENSED COMBINED BALANCE SHEET
(UNAUDITED)
December 31, 1999
<TABLE>
<CAPTION>
Assets Total
--------------
<S> <C>
Cash $ 808,000
Restricted cash 136,000
Accounts receivable, net 179,000
Prepaid expenses and other 140,000
Due from related parties 251,000
----------
1,514,000
Property and equipment, net 2,651,000
Intangibles and other, net 180,000
----------
Total Assets $4,345,000
==========
</TABLE>
<TABLE>
<CAPTION>
Liabilities and Equity
<S> <C>
Accounts payable and accrued liabilities $ 817,000
Notes payable and current portion of long-term debt 2,288,000
----------
3,105,000
Long-term debt 147,000
----------
Total Liabilities 3,252,000
----------
Equity 1,093,000
----------
Total Liabilities and Capital $4,345,000
==========
</TABLE>
F-16
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
================================================================================
2. MINORITY INTERESTS (CONTINUED)
CONDENSED, COMBINED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Year Ended
December 31, 1999
-----------------------
<S> <C>
Revenues $19,116,000
Costs of revenue 12,356,000
General and administrative 5,207,000
-----------
Operating income 1,553,000
Interest expense, net (230,000)
Other expense, net (438,000)
Income taxes (76,000)
-----------
Net income $ 809,000
===========
</TABLE>
On March 24, 2000, the other two members of OM and RPLLC purportedly voted to
merge another limited liability company into each of OM and RPLLC and buyout the
Company's interest in each for $375,000 and $50,000, respectively. The Articles
of Organization or Operating Agreement 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 merger and
buyout and subsequently filed a lawsuit to nulify the mergers and buyout.
3. DISCONTINUED OPERATIONS
Effective October 1, 1999, the Company sold its cruise operations, including
fixed assets, tradenames and other intangibles and cruise deposits, and the
stock of IT for $1,360,127 and 666,667 shares of the purchaser's common stock
with a fair market value of $ 776,401. The purchaser's common stock is listed
on the Toronto Exchange.
Net sales from cruise operations for the nine months ended September 30, 1999
and the year ended December 31, 1998 were $ 685,219 and $966,442, respectively.
These amounts are not included in revenues in the accompanying consolidated
statements of operations, but are included as part of discontinued operations.
Assets and liabilities of the cruise operations sold consisted of the following
at September 30, 1999:
Furniture and equipment $ 23,771
Tradenames and intangibles 529,456
Cruise deposits 26,548
--------
Net assets disposed of $579,775
========
F-17
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
================================================================================
3. DISCONTINUED OPERATIONS (CONTINUED)
In connection with the sale, the Company had agreed to pay an officer of the
Company 10% of the proceeds (excluding the amount paid for cruise deposits),
totaling $133,333 and transfer 10% of the purchaser's common stock, or 66,667
shares with a fair market value of $77,334, as a bonus and to repurchase
500,000 shares of common stock at $.06 per share. Additionally, the Company
agreed to transfer 100,000 shares of the purchaser's common stock with a fair
market value of $116,767 to a consultant as an advisory fee.
At December 31, 1999, the Company had paid an officer bonuses of $96,000,
leaving accrued bonuses of $7,333 and had paid $30,000 for the repurchase of
the 500,000 shares of common stock. In addition, the Company had accrued both
the consultant and officers' costs of $194,101 related to the purchaser's
common stock. The shares of the purchaser's common stock used for costs
were transferred after December 31, 1999 (see Notes 4 and 6).
In addition, the Company paid $19,730 of other costs related to the sale of
Galaxsea and IT Cruise.
4. INVESTMENT SECURITIES
Investment securities which are all considered available-for-sale were
summarized as follows at December 31, 1999:
Marketable equity securities, at cost $ 580,000
Unrealized gains 880,000
----------
Marketable equity securities, fair market value $1,460,000
==========
In addition, the Company has marketable equity securities with an original cost
of $194,101 which are restricted to be distributed to an officer and consultant
in satisfaction of commissions on the sale of discontinued operations (see Note
3).
Subsequent to December 31, 1999, the Company sold marketable equity securities
with an original cost of approximately $225,000 for a realized gain of
approximately $303,000.
5. FURNITURE AND EQUIPMENT
Furniture and equipment include the following at December 31, 1999:
Leasehold improvements $ 1,071
Furniture and equipment 76,342
--------
77,413
Less accumulated depreciation (56,104)
--------
Furniture and equipment - net $ 21,309
========
F-18
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
================================================================================
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities as of December 31, 1999 include the
following:
<TABLE>
<S> <C>
Trade accounts payable and other $ 1,344
Accrued interest payable 138,779
Accrued selling costs (Note 3) 201,434
Due to related entity 130,000
--------
$471,557
========
</TABLE>
7. INCOME TAXES
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,
---------------------------------------
1999 1998
-------------- -----------------------
Current- Federal $ - $ -
<S> <C> <C>
Current-State 11,000 -
Deferred 176,000 39,979
-------- -------
$187,000 $39,979
======== =======
</TABLE>
Components of the net deferred tax liability at December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
Deferred tax assets:
<S> <C>
Net operating loss carryforwards $ 984,000
Other, net 7,000
---------
Total deferred tax assets 991,000
Less - valuation allowance (759,000)
---------
232,000
Deferred tax liability:
Unrealized gain on available-for-sale securities (329,000)
---------
Net deferred tax liability $ (97,000)
=========
</TABLE>
At December 31, 1999, the Company had a net operating loss carryforward
available for Federal income tax purposes of approximately $9,400,000. 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 2014.
Due to the uncertainty of realization and the annual restriction discussed
above, a deferred tax asset valuation allowance has been provided.
F-19
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
================================================================================
7. 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 December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----------------------- ---------------
<S> <C> <C>
Statutory rate 34.0% (34.0)%
Goodwill amortization (16.4) 50.7
State income taxes .7 -
Other (5.7) 2.0
----- ------
Company's effective rate 12.6% 18.7%
===== ======
</TABLE>
8. NOTES PAYABLE
<TABLE>
<S> <C>
December
31, 1999
---------
Note payable to International Tours, Inc. ("International") a stockholder, interest at
9%, due January 1, 2001. The loan is without collateral. $ 267,302
Notes payable to certain stockholders, interest of 9%, payable in equal monthly
installments until maturity on June 1, 2003. The notes are unsecured and are
subordinated to the International note. 514,067
---------
781,369
Less: Current Portion -
---------
Long-Term Portion $ 781,369
=========
</TABLE>
The amounts due in subsequent years are as follows:
Notes
December 31, Payable
------------ ---------
2000 $ -
2001 290,249
2002 73,419
2003 80,306
2004 87,839
Thereafter 249,556
--------
Total $781,369
========
Debt Restructuring: As of December 31, 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, required
monthly payments of principal and interest of $50,000, had an unpaid principal
balance of $267,302 at December 31, 1999, and is unsecured.
F-20
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
================================================================================
8. NOTES PAYABLE (CONTINUED)
Until January 2000 when the available-for-sale securities could be sold, the
cash flow being generated by the Company was 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
agreed to allow the amounts accrued and owed to it to continue to remain
outstanding (with interest accruing thereon) until January 1, 2001 when unpaid
principal and interest are due in full. Until the International note is paid in
full, all payments will be suspended on the subordinated debentures issued by
the Company which have aggregate remaining principal balances of $514,067 at
December 31, 1999. These notes normally require aggregate payments of principal
and interest of approximately $9,500 per month, and are expressly made
subordinate to the International note as well as other senior debt of the
Company.
On April 6, 2000, the Company paid $275,000, including interest to
International, leaving an outstanding balance on the note of $9,980.
9. CONCENTRATIONS, COMMITMENTS AND CONTINGENCIES
License Renewal Process: The Louisiana gaming regulators (the "Regulators")
- ------------------------
have undertaken the review of all licensees operating video poker casinos. The
Regulators reviewed the ownership structure of the Company's video poker
operations under the Amendment (see Note 2) and expressed concerns whether such
structure satisfies the Louisiana residency requirements necessary to operate
video poker casinos. The Company was given until February, 1999 to restructure
the ownership of OM and RPLLC. 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
and its minority-owned gaming entities' 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.
Louisiana Regulations: The franchise payment payable by the Company and/or
- ----------------------
Operator to the State of Louisiana in 1999 and 1998 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.
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, 1999, the Operator's three remaining
gaming facilities meet the monthly fuel sales requirements to keep the maximum
50 machines allowed.
F-21
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
================================================================================
9. CONCENTRATIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
Louisiana Regulations (Continued): The Company and one of its stockholders have
- ----------------------------------
guaranteed debt of RPLLC. The balance outstanding on the notes at December 31,
1999 was approximately $2,000,000.
Cash: The Company maintains cash balances with financial institutions which
- -----
periodically exceeds FDIC insured limits.
Litigation: Subsequent to December 31, 1999, the Company became involved in
- -----------
legal matters wherein the outcome is not readily determinable. Management feels
that losses, if any, from such matter would not have a material impact on the
Company's consolidated financial statements.
Should the purported buyout of the Company's interest in OM and RPLLC be upheld,
it could materially affect future operating results (see Note 2).
In the opinion of management, there are no other contingent claims or litigation
against the Company which would materially affect its consolidated financial
position.
10. STOCKHOLDERS' EQUITY
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 has also authorized 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 of Galaxsea and IT Curise, 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-22
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
================================================================================
10. STOCKHOLDERS' EQUITY (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.
During 1999, in conjunction with the restructure of the Company's gaming
operations (Note 2) the Company redeemed 8,167,632 shares of common stock at
$.01 per share.
During 1999, the Company repurchased 500,000 shares of common stock from an
officer of Galaxsea and IT Cruise for $30,000 (Note 3).
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 per 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:
<TABLE>
<CAPTION>
Shares Exercise
Under Price Per
Option Share
----------- ---------------
<S> <C> <C>
Balance, December 31, 1997 1,000,000 $.30
Granted - -
--------- ----
Balance, December 31, 1998 1,000,000 $.30
Granted - -
--------- ----
Balance, December 31, 1999 1,000,000 $.30
========= ====
</TABLE>
Subsequent to December 31, 1999, the Company granted two Board members options
to acquire 1,000,000 of company stock each at an exercise price of $.03125 per
share. The shares are fully vested as of the date of grant and expire five years
from the date of grant.
F-23
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
================================================================================
10. STOCKHOLDERS' EQUITY (CONTINUED)
The Company 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.
11. CONTRACTS
The Operator 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 the Operator (see Note 2). Therefore,
the Company, through its consolidated subsidiaries, was the gaming operator
until March 31, 1999 when it sold a portion of its interest in the gaming
operations. The gaming contracts assign various percentages of the gaming
revenues of these establishments to various property owners, lessors or lenders.
When the Operator 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 Operator 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 the Operator has at December 31, 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 Operator 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 Lucky Lady 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 March 31, 1999, the Company no longer operated 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
received $325,000 as proceeds for the sale of all video poker related equipment
and inventory resulting in a loss of approximately $35,000 and were entitled to
20% of the net profits of King's Lucky Lady for the month of March 1999.
F-24
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
================================================================================
11. CONTRACTS (CONTINUED)
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 and/or the Operator were required to pay the property
owners $3,000 per month through October 1999.
Pelican Palace: The Company loaned 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 and/or Operator have agreed to pay 2% of its share of
net profits to an unrelated third party for a finders fee.
Gold Rush Truck Stop: The Operator owns this truck stop facility in addition to
- ---------------------
operating the gaming devices.
The Company and/or Operator are required to pay a former lender ten percent
(10%) of net gaming income as long as the Company and/or Operator continue 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. As of August 1999, the Operator no longer
operated the Diamond Jubilee.
F-25
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
================================================================================
11. 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. Construction of
the River Port Truck Stop convenience store was completed in January 1999. The
construction was financed with notes payable due in May 2000.
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.
Rent expense under the gaming leases was as follows:
<TABLE>
<CAPTION>
January 1, 1999 April 1, 1999 to
to March 31, 1999 December 31, 1999 December 31, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Kings Lucky Lady $ 91,000 $ - $ 348,000
The Longhorn Club 335,000 844,000 1,255,000
Pelican Place 242,000 599,000 660,000
Gold Rush Truck Stop 53,000 171,000 210,000
Diamond Jubilee 199,000 333,000 791,000
RPLLC 21,000 63,000 84,000
-------- ---------- ----------
$941,000 $2,010,000 $3,348,000
======== ========== ==========
</TABLE>
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 2).
F-26
================================================================================
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
================================================================================
11. 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.
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 2).
Gold Rush Truck Stop Lease: In April 1998, Ozdon 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 Ozdon entered into a new month-to-month lease with
OM. The new lease requires OM to pay Ozdon $33,333 per month (see Note 2).
Accounting and Management Agreement: In connection with the sale of a portion
- ------------------------------------
of the Company's interest in the gaming operations, the Company agreed to
continue to perform certain accounting and management functions on behalf of the
Operator for a monthly fee. The Company received approximately $165,000 under
the agreement which is netted in other expense in the accompanying consolidated
statement of operations. These functions were moved to the Operator in December
1999.
Consulting Fee: Subsequent to December 31, 1999, the Company agreed to pay an
- ---------------
officer of the Company $200,000 per year as a consulting fee.
12. 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 years ended
December 31, 1999 and 1998.
13. RELATED PARTY TRANSACTIONS
International owns 44% of the total common stock of the Company. The Company
subleased space in its corporate office to International receiving rents of
approximately $16,200 and $19,100 in 1999 and 1998.
During 1999 and 1998 the Company paid an officer of the Company consulting fees
totaling $190,000 and $63,125, respectively.
F-27
================================================================================
<PAGE>
Introduction to Unaudited Financial Statements
In the opinion of management, the following unaudited combined financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the finanical position of OM and Related
Entities at Decmber 31, 1999 and the results of their operations and changes in
cash flows for the year then ended.
F-28
<PAGE>
OM OPERATING, L.L.C. AND RELATED ENTITIES
COMBINED BALANCE SHEET (UNAUDITED)
===============================================================================
December 31, 1999
- -------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash $ 808,360
Restricted cash 135,751
Accounts receivable, net of allowance for doubtful
accounts of $42,100 179,219
Inventories, at cost 86,606
Prepaid expenses 52,799
Due from related parties 251,182
----------
Total Current Assets 1,513,917
----------
Property And Equipment, net of accumulated depreciation 2,651,196
----------
Other Assets:
Deposits 47,440
Intangibles, net 132,673
----------
Total Other Assets 180,113
----------
Total Assets $4,345,226
==========
LIABILITIES AND EQUITY
Current Liabilities:
Notes payable $2,000,000
Current portion of long-term debt 288,216
Accounts payable 154,688
Accrued liabilities 586,162
Income taxes payable 76,000
----------
Total Current Liabilities 3,105,066
Long-term debt, net of current portion 147,014
----------
Total Liabilities 3,252,080
Commitments And Contingencies
Equity 1,093,146
----------
Total Liabilities and Equity $4,345,226
==========
F-29
===============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
OM OPERATING, L.L.C. AND RELATED ENTITIES
COMBINED STATEMENT OF OPERATIONS AND EQUITY
(UNAUDITED)
===================================================
Year Ended December 31, 1999
- ---------------------------------------------------
Revenue:
Video poker $13,002,642
Truck stop and convenience store 6,112,935
-----------
19,115,577
-----------
Costs of Revenue:
Video poker 7,269,674
Truck Stop and Convenience Store 5,085,820
-----------
Total Costs of Revenue 12,355,494
-----------
Gross profit 6,760,083
General and administrative expenses 5,207,196
-----------
Operating Income 1,552,887
Interest Expense (229,958)
Other Expense (437,449)
-----------
Income Before Income Taxes 885,480
Provision for Income Taxes (76,000)
-----------
Net Income 809,480
Deficit, beginning of year (173,517)
Capital Contributions 915,670
Distributions/Dividends (458,487)
-----------
Equity, end of year $ 1,093,146
===========
F-30
=========================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
OM OPERATING, L.L.C. AND RELATED ENTITIES
COMBINED STATEMENT OF CASH FLOWS (UNAUDITED)
=============================================================
Year Ended December 31, 1999
- -------------------------------------------------------------
Cash Flows From Operating Activities:
Net Income $ 809,480
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 290,799
Loss on disposal of assets 95,336
Allowance for doubtful accounts 42,100
Changes in operating assets and liabilities:
(Increase) decrease in:
Restricted cash 64,053
Accounts receivable (53,222)
Inventories 38,157
Prepaid expense (13,199)
Deposits 15,612
Increase (decrease) in:
Accounts payable and accrued liabilities (206,153)
Accrued income taxes 76,000
----------
Net Cash Provided By Operating Activities 1,158,963
----------
Cash Flows From Investing Activities:
Purchases of property and equipment (558,548)
Proceeds from sale of equipment 130,000
Cash received as contribution 4,257
Advances to related parties (130,000)
Construction of casino and truck stop (8,500)
----------
Net Cash Used In Investing Activities (562,791)
----------
Cash Flows From Financing Activities:
Proceeds from borrowings 534,592
Payments on borrowings (271,751)
Capital contributions 41,000
Distributions paid (458,487)
----------
Net Cash Used In Financing Activities (154,646)
----------
Net Increase In Cash 441,526
Cash, beginning of year 366,834
----------
Cash, end of year $ 808,360
==========
Cash Paid During The Year For:
Interest $ 84,870
Non-Cash Investing And Financing Activities:
Net assets contributed 753,488
Completion of construction in progress 1,613,423
Capital contributions receivable 121,182
F-31
=========================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
OM OPERATING, L.L.C. AND RELATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1999
================================================================================
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
The accompanying combined financial statements include the accounts of OM
Operating, LLC (OM), a limited liability company, River Port Truck Stop, LLC
(RPLLC), a limited liability company, and Ozdon Investments, Inc. (Ozdon)
(collectively, the "Company") (See Note 2). OM and RPLLC's operating agreements
state that OM and RPLLC will terminite no later than December 31, 2050. All
significant intercompany balances and transactions have been eliminated in
combination.
The Company's operations for the year ended December 31, 1999 consisted of truck
stop facilities and/or video poker casinos in up to six truck stops, and the
video poker devices for a route of 4 bars and restaurants, all located in the
state of Louisiana. At December 31, 1999, the Company operated 2 truck stops, 3
casinos and video poker devices in one bar. Ozdon owns the property known as
"The Gold Rush Truck Stop and Casino".
Unaudited Financial Statements: In the opinion of managment, the accompanying
- ------------------------------
unaudited combined financial statements contain all adjustments (consisting of
only normal recurring accruals) necessary to present fairly the financial
position of OM and Related Entities at December 31, 1999 and the results of
their operations and changes in cash flows for the year then ended.
Use of Estimates: The preparation of combined 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 combined financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Video Poker Revenue: Video poker revenue is the net revenue from gaming
- --------------------
activities, defined as the difference between gaming wins and losses.
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.
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-32
================================================================================
<PAGE>
OM OPERATING, L.L.C. AND RELATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1999
================================================================================
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 39 years, using an accelerated method for financial accounting
purposes.
Intangibles: Intangibles, which consist of revenue interest rights to acquire a
- ------------
fixed percentage of revenues (see Note 10), 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.
Income Taxes: As limited liability companies, OM and RPLLC are not subject to
- -------------
income taxes. Income or loss of OM and PRLLC is included in the income tax
returns of their members. Ozdon 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 financial statement carrying amounts of
existing assets and liabilities and their respective tax 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.
Fair Value of Financial Instruments: The carrying amounts of financial
- ------------------------------------
instruments including cash, receivables, prepaids, accounts payable and accrued
expenses approximated fair value as of December 31, 1999 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, 1999 because interest rates on these instruments approximate
market interest rates.
Concentration: Video poker revenue represents approximately 68% of the
- --------------
Company's operating revenue for the year ended December 31, 1999 respectively.
Failure to comply with Louisiana gaming regulations regarding Video Poker could
result in license revocation (see Note 7).
F-33
================================================================================
<PAGE>
OM OPERATING, L.L.C. AND RELATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1999
================================================================================
2. OWNERSHIP STRUCTURE
Restructure of the Gaming Entities: In order to respond to concerns of the
- -----------------------------------
Louisiana gaming regulators, (see Note 8) Amendment Number Two to the OM
Operating Agreement and Amendment Number One to the RPLLC Operating Agreement
were executed in February 1999 ("the Amendments"). The Amendments were
effective April 1, 1999.
Concurrent with the Amendments, an agreement between members whereby Member #1
agreed to transfer 50% of its interest in all gaming operations (including OM,
RPLLC, and Ozdon) to another member (Member #3) for certain consideration, was
entered into.
As of April 1, 1999, ownership of OM, RPLLC and Ozdon were as follows:
Member #1 Member #2 Member #3 Total
---------- ---------- ---------- --------
OM 24.5% 51.0% 24.5% 100.0%
RPLLC 25.0% 50.0% 25.0% 100.0%
Ozdon 50.0% - 50.0% 100.0%
Thereafter, all profit and loss of OM and RPLLC will be allocated to the members
based on each members' ownership as detailed above.
On March 24, 2000, Members #2 and #3 purportedly voted to merge another limited
liability company into each of OM and RPLLC and purchase Member #1's interest in
OM and RPLLC for $375,000 and $50,000, respectively. Member #1 voted against
the purported merger and buyout and has filed a lawsuit against the other two
members to nullify the merger and transaction.
3. PROPERTY AND EQUIPMENT
Property and equipment include the following at December 31, 1999:
Land $ 10,000
Buildings 2,325,863
Leasehold Improvements 458,814
Furniture and Equipment 1,404,771
Vehicles 58,697
-----------
4,258,145
Less Accumulated Depreciation (1,606,949)
-----------
Property and Equipment - Net $ 2,651,196
===========
During 1999, the Company paid $415,000 to construct a casino at the RPLLC
location. The casino was complete at December 31, 1999, but was not in
operation as the Company was in the process of obtaining its license to operate
the casino. No depreciaton was taken on the casino in 1999.
F-34
================================================================================
<PAGE>
OM OPERATING, L.L.C. AND RELATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1999
================================================================================
4. ACCRUED LIABILITIES
Accrued liabilities at December 31, 1999 include the following:
Gaming fees payable $329,815
Accrued interest payable 151,088
Accrued payroll and payroll taxes 82,199
Other 23,060
--------
$586,162
========
5. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable consist of:
Notes payable to a bank, interest at 10.25%, secured by the receivables,
inventory and equipment of RPLLC and a first mortgage on the newly
constructed truck stop and casino. The notes are also guaranteed
by the members. Unpaid principal and interest are due in May
and July 2000.
$2,000,000
==========
Long-term debt consists of:
Note payable to a bank, interest at 8.5%, due in monthly installments of
$22,814, including interest through June 2001 when unpaid principal and
interest are due, secured by the Gold Rush real estate and guaranteed by
certain members.
$ 382,109
Other 53,121
---------
Less: Current Portion 435,230
(288,216)
---------
Long-Term Portion $ 147,014
=========
Long-term debt matures as follows:
December 31, Total
------------ --------
2000 $288,216
2001 147,014
--------
Total $435,230
========
6. RELATED PARTY RECEIVABLES
Related party receivables of $251,182 at December 31, 1999 consist of amounts
due from the members of OM and RPLLC.
F-35
================================================================================
<PAGE>
OM OPERATING, L.L.C. AND RELATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1999
================================================================================
7. INCOME TAXES
The components of the provision for income taxes as shown on the accompanying
combined statement of operations are as follows:
<TABLE>
<CAPTION>
Year Ended
December 31, 1999
-------------------------------------
<S> <C>
Current- Federal $60,000
Current-State 16,000
Deferred -
-------
$76,000
=======
</TABLE>
The following is a reconciliation of the U. S. statutory tax rate to Ozdon's
effective rate for the year ended December 31, 1999:
<TABLE>
<CAPTION>
1999
---------------------
<S> <C>
Statutory rate 34.0%
State income taxes 3.0%
----
Ozdon's effective rate 37.0%
====
</TABLE>
8. CONCENTRATIONS, COMMITMENTS AND CONTINGENCIES
The Company's gaming operations are located in south central and southwest
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 under the laws enacted in the State of Louisiana.
Such licensing and qualifications are reviewed periodically by the Louisiana
gaming regulators.
License Renewal Process: The Louisiana gaming regulators (the "Regulators")
- ------------------------
have undertaken the review of all licensees operating video poker casinos. The
Regulators reviewed the ownership structure of the Company's video poker
operations and had expressed concerns whether such structure satisfied the
Louisiana residency requirements necessary to operate video poker casinos. The
Company was given until February, 1999 to restructure the ownership of OM and
RPLLC. As a result, the Company's ownership was restructed in February 1999 and
given to the Regulators for review (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-36
================================================================================
<PAGE>
OM OPERATING, L.L.C. AND RELATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1999
================================================================================
8. CONCENTRATIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
Louisiana Regulations: The franchise payment payable to the State of Louisiana
- ----------------------
in 1999 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.
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, 1999, the Company's gaming facilities
meet the monthly fuel sales requirements to keep the maximum 50 machines
allowed.
Cash: The Company maintains cash balances with financial institutions which
- -----
periodically exceeds FDIC insured limits.
In the opinion of management, there are no other contingent claims or litigation
against the Company which would materially affect its combined financial
position.
9. EQUITY
Restrictions on Ownership: Each of the combining companies' ownership is
- --------------------------
restricted in order to comply with applicable gaming statutes. Persons who are
not suitable to be members or stockholders of the Companies under such statutes
may not own member interest or common stock in the Companies. Further, any
member or stockholder may be required, at such member's or 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
member's interest or common stock and will not be entitled to vote or receive
distributions pending such disposal.
Ozdon: Ozdon has authorized 10,000 shares of no par value common stock, of
- ------
which all 10,000 shares are issued and outstanding. Until March 31, 1999, all
the outstanding shares were owned by North American Gaming and Entertainment
Corporation, a publicly traded company. In connection with the restructure of
the gaming utilities (Note 2), ownership of 5,000 shares was transferred to
Member #3, as discussed in Note 2.
F-37
================================================================================
<PAGE>
OM OPERATING, L.L.C. AND RELATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1999
================================================================================
10. CONTRACTS
OM and RPLLC currently have three gaming and/or truck stop establishments as
well as a video poker route operation in Louisiana. OM and RPLLC's gaming
contracts assign various percentages of the gaming revenues of these
establishments to various property owners, lessors or lenders. When OM or RPLLC
enter 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, 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 and RPLLC have at December 31, 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: OM has a gaming contract with a bar. This contract provides
- -----------------
the establishment's owner with 50% of the net gaming income.
King's Lucky Lady: In April 1992, OM signed an agreement for the lease of the
- ------------------
King's Lucky Lady 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. OM 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 March 31, 1999, OM no longer operated 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, OM received $130,000 as proceeds for
the sale of all video poker related equipment and inventory resulting in a loss
of approximately $43,000 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, OM purchased the right to operate the
- ------------------------
gaming devices of this establishment. Revenue interest rights included in the
accompanying combined balance sheet are related to this purchase (See Note 1).
OM 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, OM was required to pay the property owners
$3,000 per month through October 1999.
F-38
================================================================================
<PAGE>
OM OPERATING, L.L.C. AND RELATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1999
================================================================================
10. CONTRACTS (CONTINUED)
Pelican Palace: OM 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, OM 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 OM 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, OM 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 while OM operates the
- ---------------------
gaming devices.
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: OM operates the gaming devices of this establishment for 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 OM and (ii)
interest and principal on any indebtedness of OM on any furniture, fixtures, and
equipment placed in the video poker casino, bar, or parking lot.
In August, 1998, OM obtained the rights to operate the truck stop fuel
operations and restaurant. As of August 1999, OM no longer operated the Diamond
Jubliee.
RPLLC: In January 1997, an entity owned by a member 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 Additonal 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 operatons the
Additonal 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. The related entity assigned the lease to
RPLLC in 1998. Construction of the River Port Truck Stop convenience store was
completed in January 1999. The construction was financed with a note payable
due in May 2000.
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.
F-39
================================================================================
<PAGE>
OM OPERATING, L.L.C. AND RELATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1999
================================================================================
10. CONTRACTS (CONTINUED)
Rent expense under the gaming leases was as follows for the year ended December
31, 1999:
Kings Lucky Lady $ 91,000
The Longhorn Club 1,179,000
Pelican Palace 841,000
Gold Rush Truck Stop 224,000
Diamond Jubilee 532,000
RPLLC 84,000
----------
$2,951,000
==========
Consulting Agreements: In April 1998, OM entered into a four year consulting
- ----------------------
agreement with a member. The agreement required OM to pay the member an annual
consulting fee of $400,000.
In July 1998, RPLLC entered into a consulting agreement with a member. The
agreement required RPLLC to pay the member an annual consulting fee of $50,000.
In conjunction with the restructuring of the ownership of OM and RPLLC, the
agreements were terminated effective April 1, 1999 (see Note 2).
Employment Agreement: In April 1998, OM entered into a four year employment
- ---------------------
agreement with a member. The agreement required OM to pay the member $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 the member.
In conjunction with the restructuring of the ownership of the Company, the
annual salary was reduced effective April 1, 1999 to $100,000 per year
(See Note 2).
F-40
<PAGE>
EXHIBIT 10.25
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
<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
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- 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;
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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;
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(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,
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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,
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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").
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(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
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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;
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(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
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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;
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(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:
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
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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
Schedule 6.3(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
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Schedule 13 - Disclosures Regarding International Tours Suppliers
Schedule 14 - Disclosures Regarding GalaxSea Suppliers
Schedule 15 - Disclosures Regarding Accounts Payable
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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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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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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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
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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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(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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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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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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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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(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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33 -
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
<PAGE>
34 -
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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37 -
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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38 -
(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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39 -
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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43-
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.
<PAGE>
68 -
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.
<PAGE>
69 -
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.
<PAGE>
70 -
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.
<PAGE>
71 -
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
---------------------------------------------
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF
NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION
<TABLE>
<CAPTION>
------------------------------------------------------------------
STATE OF
PERCENTAGE INCORPORATION
NAME OWNERSHIP OR ORGANIZATION
---- --------- ---------------
------------------------------------------------------------------
<S> <C> <C>
Ozdon Investments, Inc. 50% Louisiana
------------------------------------------------------------------
River Port Truck Stop, Inc. 100% Louisiana
------------------------------------------------------------------
OM Operating, L.L.C. 24.5% Louisiana
------------------------------------------------------------------
River Port Truck Stop, LLC 25% Louisiana
------------------------------------------------------------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1999 AND THE CONSOLIDATED STATEMENTS
OF OPERATIONS AND CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1999, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 248,491
<SECURITIES> 1,654,101
<RECEIVABLES> 143,049
<ALLOWANCES> 32,206
<INVENTORY> 0
<CURRENT-ASSETS> 2,015,309
<PP&E> 77,413
<DEPRECIATION> 56,104
<TOTAL-ASSETS> 2,422,343
<CURRENT-LIABILITIES> 1,015,712
<BONDS> 0
0
0
<COMMON> 306,210
<OTHER-SE> 319,052
<TOTAL-LIABILITY-AND-EQUITY> 2,422,343
<SALES> 6,033,627
<TOTAL-REVENUES> 6,033,627
<CGS> 3,944,252
<TOTAL-COSTS> 5,990,560
<OTHER-EXPENSES> (552,007)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 193,340
<INCOME-PRETAX> 401,734
<INCOME-TAX> 45,000
<INCOME-CONTINUING> 356,734
<DISCONTINUED> 946,058
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,302,792
<EPS-BASIC> .03
<EPS-DILUTED> .03
</TABLE>
