SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[x] Annual Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
or
[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission File Number 1-13530
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AMERICAN BINGO & GAMING CORP.
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(Exact Name of small business issuer as specified in its charter)
Delaware 74-2723809
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1440 Charleston Highway, West Columbia, SC 29169
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (803) 796-7875
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Securities registered under Section 12(b) of the Exchange Act: None
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Securities registered under Section 12(g) of the Exchange Act: Common Stock
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Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
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 disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
is not contained herein, and will not be contained, to the best of issuer'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.
YES NO x
--- ---
<TABLE>
<CAPTION>
<S> <C>
Issuer's revenues for its most recent fiscal year: $15,445,456
Aggregate market value of the issuer's common stock held by non-affiliates
based on the average bid and asked price as of March 5, 1999: $14,133,498
Number of shares of the issuer's common stock outstanding as of March 5, 1999: 9,945,590
</TABLE>
Transitional Small Business Disclosure Format: Yes No x
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DOCUMENTS INCORPORATED BY REFERENCE
The issuer's Proxy Statement for its annual meeting of stockholders scheduled to
be held on May 27, 1999, is incorporated by reference in this Form 10-KSB in
Part III Item 9, Item 10, Item 11 and Item 12.
<PAGE>
THIS REPORT CONTAINS STATEMENTS THAT CONSTITUTE FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E
OF THE SECURITIES EXCHANGE ACT OF 1934. THESE STATEMENTS APPEAR IN A NUMBER OF
PLACES IN THIS REPORT AND INCLUDE ALL STATEMENTS REGARDING THE INTENT, BELIEF OR
CURRENT EXPECTATIONS OF THE COMPANY, ITS DIRECTORS OR ITS OFFICERS, WITH RESPECT
TO, AMONG OTHER THINGS: (I) THE COMPANY'S FINANCING PLANS; (II) TRENDS
AFFECTING THE COMPANY'S FINANCIAL CONDITION OR RESULTS OF OPERATIONS; (III) THE
COMPANY'S GROWTH STRATEGY AND OPERATING STRATEGY; AND (IV) THE DECLARATION AND
PAYMENT OF DIVIDENDS. INVESTORS ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING
STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND
UNCERTAINTIES, AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS
DISCUSSED HEREIN AND THOSE FACTORS DISCUSSED IN DETAIL IN THE COMPANY'S FILINGS
WITH THE SECURITIES AND EXCHANGE COMMISSION.
PART I
ITEM 1 - DESCRIPTION OF BUSINESS
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BUSINESS DEVELOPMENT
American Bingo & Gaming Corp. (the "Company") was formed in 1994 as a
Delaware corporation to consummate the acquisition of charitable bingo centers
and gaming operations. The Company subsequently completed its initial public
offering in December of 1994, raising approximately $5.2 million through the
sale of 1,000,000 shares of the Company's common stock, par value $0.001 per
share (the "Common Stock"), and 1,725,000 redeemable common stock purchase
warrants. The Company used a majority of its net public offering proceeds for
expansion in 1995.
The Company substantially improved its capitalization in 1997 through two
financing transactions. In August of 1997, the Company issued 2,000 shares of
convertible preferred stock at $1,000 per share, raising $2 million in a private
equity transaction. The convertible preferred stock outstanding was converted to
common stock by December 1998. In November of 1997, the Company called all of
its outstanding redeemable common stock purchase warrants and in December of
1997 redeemed 2.3 million warrants. Each warrant was exercisable into one common
share at $5.00 per share, raising $11.5 million for the Company, or $11.1
million after associated financing costs. The Company used this capital to
finance and grow its business.
The Company has experienced substantial growth and significant changes in
the four years since its initial public offering. The Company began 1995 with
approximately $5 million in total assets and a $2 million annual revenue
runrate, and today has grown to approximately $19 million in total assets and
over $15 million in annual revenues. The Company began with six bingo centers
and no gaming operations in 1994 and today has 20 operating bingo centers and
over 800 video gaming machines ("VGMs"). The Company is planning to acquire
additional machines to meet the demand for expansion and regulatory compliance
requirements in 1999. The Company's growth accelerated dramatically in 1997 as
the Company consummated three acquisitions of video gaming businesses in South
Carolina in stock-for-stock transactions. These acquisitions accounted for $7.5
million, or 60%, of the Company's 1997 total revenues. The Company also added
ten bingo centers in South Carolina during 1997, but closed five of these
centers due to lack of profitability.
During 1998, the Company acquired eight bingo centers in Texas in three
unrelated purchase acquisitions. A Texas bingo hall acquisition was completed
in April 1998 and contributed $460,000 in revenues during 1998. Six additional
Texas halls were acquired in October 1998, which contributed $302,000 in
revenues during the last two months of 1998. The third Texas bingo transaction,
completed in late December 1998, is scheduled to begin operations near the end
of the first quarter of 1999. This transaction was comprised of the purchase of
a bingo operator's license and the assumption of an existing hall lease. In
addition to the 1998 acquisitions the Company opened two additional bingo
centers through internal development; one in South Carolina and one in Alabama.
The hall in Alabama was subsequently closed. The Company was able to cancel the
Alabama property lease, mitigating additional future costs associated with this
bingo center. The Company also terminated operations at one South Carolina
bingo center, and was able to sublease the property for the term of the
remaining lease commitment. In addition, the Company negotiated a subleasing
arrangement for the duration of the remaining lease term on a Texas bingo center
that discontinued operations in 1997. This sublease arrangement sufficiently
absorbs the costs associated with the remainder of this lease commitment.
2
<PAGE>
For the majority of 1998, the Company operated 750 VGMs in three operating
venues; routes (600), freestanding locations (90) and bingo centers (60). In
November 1998, the Company reduced overhead costs and operational risks by
restructuring the operations of the freestanding VGM locations and certain VGMs
located in bingo centers, essentially converting these operating venues into
route operations. During November and December, the Company increased the
number of operating VGMs to over 800, all in route operations.
During 1998, the Company's Board of Directors experienced significant
changes with five of the six current members of the Board having joined the
Board in 1998. Additionally, in June 1998, the corporate office was relocated
to West Columbia, South Carolina from Austin, Texas. Approximately 63% of the
Company's revenues are derived in South Carolina. Management believes that the
relocation of its corporate offices to South Carolina strengthened the Company
and the support available to its operations. This relocation resulted in an
almost completely new management team and support staff composition.
PRINCIPAL SERVICES AND MARKETS
Total U.S. gross wagering grew from $587 billion in 1996 to $639 billion in
1997. Gaming receipts comprised approximately 9.3% of the total U.S. personal
income in 1997, as compared to 6% in 1996. Total gross wagering includes all
revenues generated through parimutual, lottery, casino, bookmaking, charitable
and Indian reservation wagering. Total net wagering equals the total gross
wagering less player winnings. Within the casino segment of this market, total
non-casino video gaming gross wagering was approximately $14.4 billion in 1996
and $16.1 billion in 1997. Video gaming is currently legal in various forms in
11 states in the U.S. (Colorado, Louisiana, Michigan, Montana, Nevada, New
Jersey, Oregon, Rhode Island, South Carolina, South Dakota, and West Virginia).
All of the Company's video gaming revenues are currently earned in South
Carolina, which has approximately 34,000 VGMs in operation today, a 13% increase
in machines over 1997, with total gross wagering of over $2 billion annually and
a net wagering of approximately $678 million annually.
The Company's business is primarily focused in the non-casino video gaming
and charitable bingo niches of the U.S. market. Net wagering from non-casino
video gaming was $1.4 billion in the U.S. in 1996, increasing to $1.7 billion (a
17% increase) in 1997. Video gaming revenues comprised approximately 63% of the
Company's total revenues in 1998, with bingo related revenues providing about
37%, as compared to the ratios for 1997 of 72% and 27%, respectively. Management
intends to continue the migration to a more evenly balanced revenue mix and to
spread its risk by expanding its business into other markets in the future.
3
<PAGE>
Video gaming operations
- -------------------------
The Company's video gaming operations in South Carolina have traditionally
been divided into three operating venues, bingo centers, routes and freestanding
locations. In 1998 the Company restructured the operation of its freestanding
locations and certain of its bingo center operations and essentially converted
these operations into route operations. The Company's video gaming operations
have grown rapidly with 30 VGMs in operation at the beginning of 1997, and 714
VGMs in operation at the end of 1997. The total number of VGMs remained at this
level through October of 1998 and was increased to 800 VGMs in operation by the
end of 1998.
The Company had over 430 VGMs in route operations in 12 counties in South
Carolina prior to restructuring the operation of its freestanding locations in
November 1998, and increasing to 800 VGMs in route operations at the end of
1998. In the route business, the Company places VGMs in convenience stores,
grocery stores, restaurants, nightclubs, sports bars, laundromats, bowling
alleys and other high customer volume locations. The Company and the location
owner/operator typically split the net VGM profits, often on a 50/50 basis.
During 1997, the Company's route operation was the second most profitable
operating segment. In 1998, the Company's route operation was the most
profitable.
The Company also had over 230 VGMs in freestanding locations, primarily in
Columbia, Charleston and North Augusta, South Carolina, prior to restructuring
the operation of its freestanding locations and certain bingo center operations
in November 1998. These machines were operated as route machines in the later
part of 1998. These locations are often located in strip malls or other
high-traffic areas. This video gaming venue typically offers the best facilities
and highest level of customer service to video gaming customers and more closely
resembles a casino-style environment for its regional area. These locations also
have the highest direct operating costs of the three video gaming operating
venues due to higher rent and personnel costs, customer service and site
improvements.
The Company operated approximately 90 VGMs in bingo centers, primarily in
Charleston and Columbia, South Carolina, prior to restructuring the operation of
its freestanding locations and certain bingo center operations in November 1998.
Today, these machines are part of the route operations. There is normally
strong financial benefit derived from operating VGMs in bingo centers as these
sites were typically drawing attendance of 300-500 players per night, many of
whom also enjoy video gaming. There normally are personnel and overhead cost
economies with bingo center VGM operations compared to the freestanding
locations. In 1997 and for part of 1998, this operating venue was the most
profitable for the Company.
During the second and third quarters of 1998, the Company reviewed its
three video gaming operating venues and the resulting contributions to the
profit margin. Numerous factors were considered in this analysis including:
- - the rising cost of labor and overhead in the freestanding locations;
- - restricted hours of operation in the bingo centers;
- - growth potential in each of the venues; and
- - direct operating costs for the locations.
As a direct result of this review, the Company reduced overhead costs and
operational risks by restructuring the operations of the freestanding locations
and certain of the bingo center operations, essentially converting these
operating venues into route operations in November 1998. The Company increased
profits and streamlined operations while continuing to provide the VGMs,
maintain control of the most desirable locations through subleasing and lease
arrangements and maintain ownership of the VGMs.
4
<PAGE>
Bingo operations
- -----------------
Bingo is derived from an Italian game created in 1530. Bingo was introduced
in the U.S at an Atlanta carnival in 1929. At that time, bingo was played with
cards covered with beans and called "beano," which later changed to bingo. Bingo
changed to paper cards and colorful daubers in the 1980s as a way to allow
players to play more cards at a time. In the 1990s bingo started to evolve again
with the advent of electronic "card-minders," which allow players to play up to
600 bingo cards simultaneously. Electronic card-minders allow a player to use a
keyboard, touch-screen or light pen to mark numbers on a video monitor or on a
hand-held portable unit. The Company began introducing card-minders into its
bingo centers in 1996, which have generally been successful. Management believes
that card-minders are easier to play, allow more bingo to be played, reduce
paper costs, appeal to younger players, and increase the average spend per
player. Management has continued to introduce this technology in its Texas and
Alabama operations and is exploring being among the first to do so in South
Carolina.
The Company's bingo operations are located in South Carolina, Alabama and
Texas. In South Carolina, total charitable bingo gross revenues for 1996 were
$79 million, declining to $69 million in 1997. Management attributes this
decline to two factors; a change in the charitable bingo laws in October of
1997, and the introduction of Indian-operated bingo in South Carolina in the
third quarter of 1997. Texas (with $485 million in 1996 and $492 million in
1997 charitable bingo gross revenues) is the largest charitable bingo dollar
producing state in the U.S., but is generally less profitable for commercial
lessors than other states due to more restrictive lessor rent limits. In 1997,
an overall U.S. average of 74.3% of total bingo receipts were paid back to the
players in the form of prizes, with 13.6% of total receipts paid for expenses
and 3.2% for taxes, leaving 8.9% of total receipts for the charities. The
Company's rental payments are a portion of the 13.6% charities pay for expenses,
with labor and supply costs also comprising a significant portion of charity
expenses. From its rental collections, the Company, in turn, covers the costs of
its bingo property rents, property management, utilities, supplies, insurance,
repairs and maintenance, security, licenses, taxes and other overhead costs to
earn a profit. By virtue of their fixed cost structure (guaranteed prize
payouts, fixed rent, labor and overhead, etc.), bingo centers have substantial
direct operating costs. Thus, even small changes in attendance can significantly
affect a bingo center's profitability for the Company and the charities. When a
bingo center does not draw the necessary attendance to cover its fixed costs,
the Company will likely not be able to collect any rent, and ultimately the
center may be shut down. This dynamic has caused the Company to close several
centers in the past.
Total charitable bingo industry receipts were $4.0 billion in the U.S. in
1996 and $3.9 billion in 1997. It is estimated that charitable bingo represents
5% of the total consumer spending of gaming dollars. North American charitable
bingo receipts have been primarily flat since 1993 based on the proliferation of
competing Indian games, casinos, lotteries and other forms of gaming. In 1995,
there were 64,000 charitable bingo centers in North America with over 60,000
organizations licensed to operate bingo. In 1997, there were over 70,000
charitable bingo centers with over 65,000 licensed organizations. Bingo players
are traditionally members of the older population that have more disposable
income and time. According to International Gaming and Wagering Business
magazine August 1998 edition, "Baby Boomers are now entering bingo's 50+ core
demographic; if charitable bingo halls simply maintain their existing
penetration of this age group, the number of players will rise over the next
decade".
As a charitable bingo commercial lessor, the Company provides investment
capital, facility set up, maintenance and management support for charities that
utilize bingo for fundraising. The Company derives bingo revenues from rental,
paper sales and entrance fee payments received from participating charities that
conduct bingo sessions at the Company's centers. Additional revenues are also
derived from bingo center vending and concession operations, pull-tab sales,
dauber sales and other miscellaneous revenues.
5
<PAGE>
Charities operate bingo centers and ultimately determine their financial
and operational success. The Company, by virtue of its substantial initial and
ongoing investment in bingo centers, operates in an advisory role regarding
bingo center operations. Both the Company and the charity have a mutual interest
in the success of a bingo center and positive lessor-charity relations are
critical to a bingo center's success. The Company helps its participating
charities develop and market bingo programs, hire employees, review results and
maintain financial controls. When a bingo center is financially successful,
there is very low charity turnover. Marginal or unprofitable bingo centers
generally have higher charity turnover. The Company maintains short-term leases
with its charities in order to ensure continual charity interest in the success
of a center.
The Company presently has twenty operating bingo centers with 70 charities
operating within these bingo centers, and the Company is currently looking for
opportunities to acquire additional centers. There can be no assurance, however,
that the Company will be able to acquire additional centers. The Company today
has seven centers in South Carolina, three in Alabama and ten in Texas. The
Company closed five start-up bingo centers during 1997 and two in 1998 due to
lack of profitability. The Company intends to grow its bingo operations through
acquisitions of operating bingo centers. Acquisitions typically cost more than
start-ups, but have less risk due to greater predictability of financial results
and no dilution of existing bingo markets.
COMPETITION
Since non-casino video gaming operations and charitable bingo centers are
typically low capital operations, there is not a significant financial barrier
to entry in these markets on a small scale; however, only well-capitalized
entrants can compete in these industries on a large-scale level. Also, rigorous
regulatory requirements, legal complexities and perpetual political pressures
serve to reduce the entry of many would-be competitors in these markets.
Bingo serves as a fun, social gathering for most players, and, as a result,
they tend to be loyal to their chosen center. Within the charitable bingo
industry, the Company competes with many other bingo centers in South Carolina,
Alabama and Texas. Since bingo prize payouts are often legally limited and
consistent among competing bingo centers, competition is normally focused on a
center's location, parking, amenities, and customer service. The Company
operates its bingo centers within the parameters of applicable laws and
regulations. The Company thus seeks to provide the most desirable bingo centers
in its respective markets in order to generate and build long-term player
loyalty. Additional competition within the bingo market also comes from bingo
centers directly owned and run by charities. In general, however, such centers
have not been able to compete with commercial centers due to generally lower
bingo prize payouts, smaller and less desirable facilities and amenities, and
fewer bingo sessions. During the last half of 1998, the Company experienced
significant direct competition at certain South Carolina locations, and average
attendance at each session declined as a result. The Company believes that
appropriate marketing and operating strategies can generally reverse this
short-term trend. Indian bingo is also a growing segment within the bingo
industry that has significant competitive advantages, including fewer regulatory
restrictions and lower taxes.
Within the gaming industry, the Company competes with many other operators
in South Carolina. Today, with 800 VGMs in operation, the Company has
approximately 2% of the total operating VGMs in South Carolina. The Company has
been ranked as one of the top 10 VGM operators in South Carolina. The Company
operates in the bingo center, route, and freestanding location venues of the
South Carolina gaming market and competes with many other private operators in
these markets. The major competitors in the Company's geographical locations are
Collins Entertainment, Tim's Amusements, McDonald's Amusements and American
Amusements. Although most VGMs are virtually the same, the Company believes that
its capitalization, desirable locations and experienced management team give it
a competitive advantage over many other operators within these market segments.
In 1997, the South Carolina daily average machine gross revenue was $63. The
Company's machines averaged $73 in the fourth quarter of 1998. Legalization of
VGMs in near-by states could materially affect the Company's operations in South
Carolina.
6
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Additional competition for gaming dollars comes from other sectors of the
gaming industry such as casinos, riverboats, lotteries, card rooms, jai alai and
pari-mutuel wagering. The Company is aware of this competition and locates its
bingo and gaming centers in areas believed to have a higher insulation level
from this type of competition. The Company also recognizes additional potential
competition from internet gaming.
The Company believes that bingo and video gaming patrons represent unique
value-oriented customers for whom a few hours of video gaming or bingo
entertainment can cost much less than other forms of gaming entertainment. In
fact, an evening of bingo entertainment typically costs only $10 - $50 and
provides payouts that rival the average slot machine. In addition, most other
forms of gaming do not provide the high degree of social interaction value
traditionally associated with bingo.
GOVERNMENT AND OTHER REGULATIONS
The $639 billion U.S. gaming industry is highly regulated and monitored and
the Company's operations are no exception. The Company is committed to being
compliant with all regulatory requirements and laws that govern the operation of
its business.
Charitable bingo regulations vary from state to state and control the level
of prize payouts, entrance fees and payments made to commercial landlords and
promoters. Licensing requirements and costs also vary from state to local
levels. The Company's bingo operations are currently regulated in; South
Carolina by the Department of Revenue, in Texas by the Texas Lottery Commission,
and in Alabama at the county level. To conduct charitable bingo, the state
and/or local regulating authorities must license the charitable lessor and its
associated charities, who are responsible for the direct operation of bingo
centers, employment and payment of personnel, and maintenance of financial
accounts and records. Regulations generally prohibit management control by the
lessor, which removes the Company from staffing obligations and expenses. In
addition, most states require that participating charities be responsible for
all marketing activities and expenses. Most states also limit the amount of
rent that a lessor can charge a charity for use of a bingo center and equipment.
Most states also limit the number of bingo sessions that may be conducted in a
week, as well as the prize money that can be paid out per session.
In 1997, about 74.3% of total U.S. bingo center receipts were paid to the
players as prizes, with 13.6% going to expenses such as rent, labor and
supplies, 3.2% going for taxes and charities netting about 8.9%. The Company
earns its return from the rental portion of the 13.6% of expenses. Significant
changes in the South Carolina charitable bingo laws in October 1997 affected the
results of operations in 1998 resulting in decreased revenues in 1998. These
changes require the charity to pay a direct tax of 16.5% of the total program
value, thereby reducing the amount of the charity proceeds available for payment
to their commercial lessors and promoters.
In video gaming, the rules and regulations under which the Company operates
change frequently and require the Company to monitor continually the legislative
processes that affect these regulations. The Company expends considerable time
and financial resources managing its various regulatory compliance activities,
and expects the gaming industry to continue to be highly regulated. In fact,
President Clinton has formed the "National Gambling Impact Study Commission" to
measure the social and economic impacts of consumer spending on gambling, with a
report due in 1999. Management believes that this report may recommend
increased regulation and taxation for the gaming industry, perhaps on a national
level.
Presently, in South Carolina, a video gaming operator must buy a machine
license from the state for each VGM. Each VGM license currently costs $4,000
for a two-year period, which would currently total over $3.2 million every two
years for the Company's 800 VGMs in South Carolina. There are currently no
additional taxes on VGMs in South Carolina, although it is likely that variable
taxes may be implemented in the future to replace or modify the current
licensing structure. There are also very specific regulations regarding the
operation of the VGMs in South Carolina, including, among others:
7
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- - Only state-authorized machines can be operated;
- - Machines cannot operate on Sundays;
- - Machines cannot pay out net prizes of more than $125 per player per day in
winnings;
- - There cannot be more than five machines per gameroom;
- - Each gameroom must have its own cashier/attendant;
- - Each gameroom must have a separate utility meter, firewall and exit.
These regulations, while burdensome, do serve to protect the South Carolina
gaming market from larger, national casino operators. Certain of these
limitations are currently being considered for revision or elimination by the
South Carolina legislature and thus these regulations may be changed
significantly in the near future. It is expected that additional regulations
will be placed on the operation of VGMs in South Carolina in the future. With
the election of a new governor in South Carolina in November 1998, new
regulations could include background checks for operators, online connection for
reporting of the VGMs to the State Department of Revenue, and a new revenue tax
and/or licensing structure.
The Company is currently preparing to comply with the South Carolina
regulatory requirements for online reporting for each VGM. Connection to this
reporting system is forecasted for the third quarter of 1999. Specifications
for the equipment necessary for this reporting include both hardware and
software purchases during 1999. The Company has identified all equipment that
would require software upgrades and replacement. The Company has allocated
approximately $1.9 million of its 1999 capital budget to include these
procurements; $700,000 in VGM purchases, $600,000 for software upgrades and
$400,000 for peripheral on-line connection equipment.
The recent election of a new governor in South Carolina and the recent
decision by the South Carolina Supreme Court that video gaming machines do not
violate the South Carolina Constitution are significant events. These events
increase the likelihood that South Carolina's current regulatory system and
licensing requirements will be substantially altered in the near future.
However, at this time management cannot predict the changes which may be imposed
or the impact that such changes may have on the Company's operations and
profitability.
EMPLOYEES
As of March 1, 1999, the Company had 41 full-time equivalent employees.
The Company, under state bingo laws, has no employees involved in the actual
operation of the charitable bingo centers, as the charities are responsible for
hiring the employees to operate the bingo centers. No employee of the Company is
represented by a labor union or is subject to a collective bargaining agreement.
Note: the Company has relied on the following sources for industry
information used in this report: International Gaming & Wagering Business
(August 1997 & 1998); National Association of Fundraising Ticket Managers (1997,
1996 and 1995 Charity Gaming in North America Reports).
8
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ITEM 2 - DESCRIPTION OF PROPERTY
- -------------------------------------
The Company's principal executive offices are located at 1440 Charleston
Highway, West Columbia, South Carolina, 29169. The Company leases space for the
majority of its bingo operations in Texas, Alabama and South Carolina and in
turn subleases its bingo centers to various charities. The Company is
responsible for real estate taxes, insurance, common area maintenance and repair
expenses on certain of its leases. The Company owns three of its bingo centers
and its corporate headquarters in South Carolina. The Company believes that the
condition of its leased and owned properties is good. No single property, leased
or owned, amounts to 10% or more of the Company's total assets.
The following table summarizes the Company's leased properties as of March 1,
1999.
<TABLE>
<CAPTION>
State City Location Purpose Location Name Status
- ------------ ------------- ---------------- -------------- ---------------------------
<S> <C> <C> <C> <C>
Alabama Mobile Bingo Hall Bingo Haven Operating
Mobile Bingo Hall Chickasaw Operating
Montgomery Bingo Hall Charity Bingo Operating
South Charleston Bingo Hall Beacon I Operating
Carolina
Charleston Bingo Hall Lucky I Operating
Charleston Bingo Hall Lucky II Operating
Charleston Bingo Hall Shipwatch Operating
Charleston Bingo Hall Ponderosa Operating
Charleston Bingo Hall Beacon II Closed - lease expires 4/00
Charleston Bingo Hall Lazy B/OB Closed/Subleased- lease
expires 4/99
Columbia Bingo Hall Garners Ferry Closed lease expires 7/99
Road
Darlington Video Gaming DMC Operating
North Augusta Bingo Hall RedWing Closed Subleased to video
gaming route operation
North Augusta Video Gaming Double 7's Subleased - part of route
operations
North Augusta Video Gaming Golden Palace Subleased part of route
operations
North Augusta Video Gaming Lucky 4 Subleased part of route
operations
Texas Abilene Bingo Hall Ambler Operating
Abilene Bingo Hall West Texas Opens 3/99
Amarillo Bingo Hall Lavaca Operating
Amarillo Bingo Hall Samaritan Operating
Austin Bingo Hall Fortune Closed - lease expires 8/99
Austin Bingo Hall Paradise Operating
Brownsville Bingo Hall Americana IV Closed/Subleased
Lubbock Bingo Hall Lucky Operating
Lubbock Bingo Hall Meeks Operating
Lubbock Bingo Hall Parkway Operating
McAllen Bingo Hall Americana I Operating
Odessa Bingo Hall Strike It Rich Operating
San Antonio Bingo Hall Blanco Operating
</TABLE>
9
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ITEM 3 - LEGAL PROCEEDINGS
- ------------------------------
In July of 1995 the Company bought three Florida bingo centers from Phillip
Furtney and two corporations related to Mr. Furtney (which corporations and Mr.
Furtney are referred to collectively for purposes of this discussion as
Furtney). On June 12, 1997, Furtney filed a lawsuit against the Company in the
Circuit Court in Florida, alleging breach of contract on these purchases.
Furtney alleged that the Company defaulted on its original purchase note and
stock obligations under the purchase agreements. Furtney seeks to recover
damages in the amount of $900,000 related to these allegations. On July 12,
1997, the Company answered this lawsuit and filed a counterclaim against Furtney
alleging, among other things, fraud, negligent misrepresentation, breach of
express warranties, contractual indemnity and tortious interference with
contractual rights. The Company believes that it was materially defrauded in
its purchase of these three Florida bingo centers from Furtney in that Furtney
made no disclosure to the Company of an ongoing criminal investigation of the
operation of these bingo centers by the Florida State Attorney General's Office,
and that Furtney was fully aware of this investigation. The state of Florida
temporarily closed these three bingo centers, as well as several other centers
formerly owned by Mr. Furtney, in November 1995. The Company re-sold these three
bingo centers in December of 1995. In January of 1997, the Company and the
State of Florida settled all matters regarding the Company's previous ownership
and operation of these bingo centers. The Company believes that Furtney's
lawsuit against the Company is completely without merit and that the Company
will prevail in its counterclaim against him. There can be no assurance of this
result, however, and a decision against the Company could have a material
adverse effect on the financial position and operations of the Company.
In 1997 one of the Company's subsidiaries was named a defendant (among many
other video gaming operators) in a legal action in the Federal U.S. District
Court in Columbia, South Carolina filed by video poker players. This action
alleges various wrongful acts by the defendants, including allegations that
certain of the defendants' video gaming operations in South Carolina: i)
comprise a lottery, which violates the state constitution; ii) violate the
state's daily net video gaming machine payout limit of $125 per player; iii)
violate the state's single premise rule which only allows up to five video
gaming machines per premise; and iv) violate the state's prohibition against
beer and wine permit holders allowing gambling or games of chance. The
plaintiffs in this action are attempting to have this action certified as a
class action lawsuit. The plaintiffs seek to recover the money lost from playing
video poker and to restrict or otherwise limit in various respects the manner in
which video gaming operations are conducted in South Carolina. The District
Judge certified questions for an advisory opinion of the South Carolina Supreme
Court regarding whether video gaming constitutes an illegal lottery in South
Carolina. The Supreme Court issued an opinion in November 1998 stating that
video gaming does not constitute an illegal lottery. Other issues in this case
are still pending in the District Court. The Company believes that this action
is completely without merit and will defend itself vigorously. If this case were
to be decided against the Company, it would likely have a material adverse
effect on the financial position and operations of the Company.
In 1997, the South Carolina Department of Revenue and the South Carolina
Law Enforcement Division brought a declaratory judgment action against various
organizations whose members have beer and wine permits and also offer video
poker for play. The suit was also brought against certain businesses in the
video poker industry. Neither the Company nor any subsidiary is a named
defendant in this case. The plaintiffs have styled the case as a class action
and have requested that the court declare that the South Carolina Code prohibits
beer and wine from being sold at establishments that provide video poker
machines for play. At issue in the case is whether a specific South Carolina
statute (S.C. Code Section 61-4-580(3)) prohibits a beer and wine permit holder
from also offering video poker for play. The plaintiffs have filed a motion that
the case be certified as a class action and have filed a motion for summary
judgment. The defendants are vigorously defending the case. If this case were to
be decided in favor of the Department of Revenue, it would likely have a
material adverse effect on the financial position and operations of the Company.
10
<PAGE>
Additionally, on June 30, 1998, the South Carolina Department of Revenue
announced that as of August 1, 1998, it would no longer allow beer and wine
permits at any location that also offers video poker, based on its
interpretation of the South Carolina statute noted above. However, in two
separate state court cases, two state Circuit Court judges have entered
injunctions prohibiting the Department of Revenue from enforcing its
interpretation of the South Carolina statute at issue at the current time. At
the current time, the Department of Revenue is issuing beer and wine permits for
locations which also offer video poker. If this issue were to be decided in
favor of the Department of Revenue, it would likely have a material adverse
effect on the financial position and operations of the Company.
On September 9, 1998, the Company filed a lawsuit in the Court of Common
Pleas for the Fifth Judicial Circuit in Columbia, South Carolina, against two
former directors, Greg Wilson and Robert Hersch, Investors Associates, Inc.,
which previously served as the Company's underwriter, and two former employees,
Roy Stevens and Paul Hermelink. On February 26, 1999, the Company and Greg
Wilson entered into a settlement with respect to this lawsuit and other issues
and thus Greg Wilson has since been dismissed with prejudice from this lawsuit.
The lawsuit seeks to recover both actual and punitive damages, as well as the
return of profits wrongfully obtained and the return of assets, including common
stock of the Company, wrongfully acquired, pursuant to various causes of action.
On September 30, 1998, Greg Wilson and various family members filed suit against
the Company in the Court of Chancery for the State of Delaware, which lawsuit
was also dismissed with prejudice in connection with the settlement with Greg
Wilson and various family members discussed above.
On December 17, 1998, Roy Stevens, a former employee and current
shareholder of the Company, filed a lawsuit against the Company, certain of its
subsidiaries, and certain officers, directors and employees of the Company in
the Court of Common Pleas for the Eleventh Judicial Circuit in Lexington, South
Carolina. The lawsuit alleges that the defendants breached fiduciary duties,
breached contracts, maliciously prosecuted the plaintiff, and engaged in various
fraudulent and illegal acts. The plaintiff seeks to recover actual and punitive
damages of an unspecified amount, seeks the reassignment of a lease agreement
which secures a promissory note issued by the Company to the plaintiff, and
seeks to have a receiver appointed to take control of the Company during the
pendency of this lawsuit. The Company believes that this lawsuit is completely
without merit and will defend itself vigorously. This lawsuit is in the early
stages and discovery has not yet commenced. If this case were to be decided
against the Company it would likely have a material adverse effect on the
financial position and operations of the Company.
The South Carolina legislature and the Governor of South Carolina are
currently considering legislation that could significantly overhaul the
regulatory framework for video poker in South Carolina and impose significantly
higher taxes. Although it is anticipated that some legislation will be adopted
in 1999, the details of such legislation and the impact of such legislation is
not known at the current time. However, any such legislation, if adopted, could
have a material adverse effect on the financial position and operations of the
Company.
11
<PAGE>
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------------------
There were no matters submitted to a vote of the stockholders of the
Company during the fourth quarter of 1998.
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ---------------------------------------------------------------------------
MARKET INFORMATION
The Company's Common Stock is traded on the NASDAQ SmallCap Market System
under the symbol "BNGO". The following table shows the range of reported high
and low closing bid prices for the Company's Common Stock for the periods
indicated as reported on the NASDAQ Summary of Activity monthly reports.
<TABLE>
<CAPTION>
Fiscal 1998: High Low Fiscal 1997: High Low
- -------------- ------ -------- -------------- ------- ------
<S> <C> <C> <C> <C> <C>
First Quarter $6 5/8 $ 3 1/8 First Quarter $2 5/16 $1 1/4
Second Quarter $ 4 $2 11/16 Second Quarter $4 7/16 $1 1/2
Third Quarter $3 1/8 $ 1 3/4 Third Quarter $ 7 7/8 $ 4
Fourth Quarter $ 3 $ 1 5/16 Fourth Quarter $10 1/2 $ 5
</TABLE>
SECURITY HOLDERS
As of March 5, 1999, the approximate number of record holders of the
Company's Common Stock was 129 and the approximate number of beneficial
shareholders was 2,679.
DIVIDENDS
The Company has never paid, and currently has no intention to pay, any
dividends on its Common Stock. The Company paid a 7% annual dividend on a
quarterly basis on its convertible preferred stock, which was fully converted to
Common Stock by December 1998.
RECENT SALES OF UNREGISTERED SECURITIES
On March 25, 1998, the Company issued 29,630 unregistered shares of Common
Stock to Hal D. Ryan as partial consideration for the acquisition by the Company
of Ambler Bingo, Inc., which operates a bingo facility in Abilene, Texas. On
October 30, 1998, the Company issued 128,000 unregistered shares of Common Stock
to Gary Mike Ehler as partial consideration for the acquisition by the Company
of six corporations which operate six bingo halls, with three of the bingo halls
located in Lubbock, Texas, two located in Amarillo, Texas, and one located in
Odessa, Texas. In addition, during 1998 the Company issued a total of 2,381
unregistered shares of Common Stock to four employees of the Company pursuant to
the Company's Employee Stock Purchase Plan, which stock was issued at a price of
$2.55 per share. Each of the issuances of stock identified above was considered
by the Company to be exempt from registration under the Securities Act of 1933
pursuant to Section 4(2) as a transaction by an issuer not involving any public
offering.
12
<PAGE>
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- --------------
OVERVIEW
American Bingo & Gaming Corp. was incorporated in 1994 to pursue bingo and
gaming business opportunities. The Company believes that the North American
non-casino video gaming and charitable bingo markets are highly fragmented, are
overlooked by larger gaming companies, and are therefore attractive for
consolidation. In fact, the Company is the largest public company consolidating
the charitable bingo center industry in the U.S. The Company's strategy is to
continue to rapidly grow its gaming and bingo operations through acquisitions,
developments and internal growth.
The Company's financial results from its gaming and bingo operations are
determined by a number of factors:
- - attendance and customer spending at the Company's facilities;
- - number of facilities in operation and idle properties;
- - payout percentage paid by the Company's VGMs;
- - lessor rents and allowable number of sessions conducted at the bingo
centers;
- - operating costs and overhead costs;
- - competitor locations;
- - market conditions; and
- - government rules and regulations.
The Company's freestanding video gaming operations have substantial
personnel and operating costs and the Company's bingo centers have substantial
rental costs. As a result of these high fixed costs, the financial results of
these two business segments are particularly leveraged by customer attendance
and spending. The Company's financial results are also subject to seasonal
factors, with cooler months generally better than warmer months. These factors
are a key element behind management's desire to continue to grow revenues and
diversify operations through expansion and venue diversification.
The Company's South Carolina video gaming route operations continue to be
the major contributor to revenues. Texas and Alabama bingo expansions and
existing operations also have improved profitability, which was offset by South
Carolina bingo losses. The Company will continue to look for improvement in
profitability through diversification of revenues and continued expansion both
internal and external.
During the second and third quarters of 1998, the Company reviewed its
three business video gaming venues and the resulting contributions to the profit
margin. As a result of this review, the Company reduced overhead costs and
operational risks by restructuring the operations of the freestanding and bingo
center locations, essentially converting these operating venues into route
operations in November 1998. By doing this, the Company intends to increase
profits and streamline operations while continuing to maintain control of the
most desirable locations through subleasing and lease arrangements and maintain
ownership of the VGMs. This reorganization also allowed the new management team
and Board of Directors to focus on other improvements within the Company, and
manage its growth.
The Company expects 1999 to be a more profitable year in terms of its
gaming and bingo segments. The Company's 1999 results of operations and its
financial condition could be negatively affected if video gaming were abolished
or adversely modified in South Carolina.
13
<PAGE>
RESULTS OF OPERATIONS
COMPARISON OF FISCAL 1998 TO FISCAL 1997 (Note: Fiscal 1997 results have been
restated to incorporate the historical financial operations of Gold Strike,
Lucky 4 and Darlington Music Company 1997 pooled acquisitions.)
The Company reported a net loss of $2.6 million for the year ended December
31, 1998 as compared to net income in 1997 of $1.7 million. The loss in 1998
was primarily attributable to changes in the South Carolina bingo market and the
related cost of several idle properties on which the Company was paying rent but
generating no value, write off of uncollectible accounts receivable and unusual
corporate office relocation and other expenses.
The Company expects overall earnings from operations to increase in 1999 as
a result of the reorganization of the video gaming segment, expansion of the
bingo segment in Texas and a reduction in future lease obligations primarily in
South Carolina for closed or marginal bingo locations.
Revenues
- --------
During 1998, the Company acquired eight bingo centers in Texas in three
unrelated purchase acquisitions. The Ambler Bingo Hall acquisition was
completed in March 1998 and contributed $460,000 in revenues during 1998. Six
additional halls were acquired in October 1998 as a single transaction, which
contributed $302,000 in revenues during 1998.
Total revenues increased by 26% to $15.4 million in fiscal 1998 from $12.2
million in fiscal 1997. Approximately $10 million, or 63%, of 1998 revenues
were generated by the Company's South Carolina video gaming operations, versus
$8.9 million, or 72%, in 1997. Approximately $4.9 million, or 31%, of 1998
revenues were comprised of charitable bingo rental receipts, paper sales and
promoter fees, as compared to $2.9 million, or 24%, in 1997. The balance of
revenues for each year was comprised of, supplies, vending, concessions and
other miscellaneous sales. During 1998, approximately 33% of the Company's bingo
related revenues were generated in South Carolina, 31% in Alabama and 36% in
Texas, compared to 43%, 35% and 22%, respectively, in 1997.
1998 revenues derived from South Carolina bingo operations decreased over
1997 as a direct result of changes in the bingo laws in October of 1997 and
increased competition. During the second half of 1998, the Company experienced
significant direct competition at certain South Carolina locations with
attendance declining an average of twenty people per session, or 6%. The Company
believes that appropriate marketing and operating strategies can reverse this
trend. Significant tax changes in the South Carolina charitable bingo laws in
1997 also affected the results of operations in 1998. These changes require the
charity bingo's to pay a direct tax of 16.5% of the total program value. The
combination of these events reduces the amount of the charity proceeds available
for payment to commercial lessors and promoters.
Costs and expenses
- --------------------
Total costs and expenses were $17.8 million in fiscal 1998 as compared to
$11.0 million in fiscal 1997, an increase of 62%. This increase includes $4.0
million of write-offs and other unusual charges, or 23% of total costs and
expenses. These write-offs and unusual charges relate to asset write-downs
principally on non-performing bingo properties, future operating lease
obligations on idle or unprofitable bingo centers, corporate office relocation,
staff recruiting, legal and other unusual charges. Direct salaries and other
compensation totaled $2.2 million in 1998 versus $2.0 million in 1997,
consisting primarily of the Company's labor-intensive freestanding video gaming
business in South Carolina during the first ten months of 1998. Rent and
utilities totaled $2.4 million in 1998 versus $1.9 million in 1997, an increase
14
<PAGE>
of 27%, which resulted from the increase in the number of bingo and gaming
centers under lease. Direct operating costs totaled $2.4 million in 1998 versus
$1.6 million in 1997. Direct operating costs increased approximately $800,000
to 15% of total revenues in 1998 compared to 13% of total revenues in 1997. The
Company's video gaming licenses increased approximately $500,000 and the Company
had $2.5 million in fixed asset acquisition (mainly gaming machines) and
improvements in 1998 which increased license expense and depreciation costs to
$1.4 million and $2.1 million, respectively, compared to $900,000 million and
$1.1 million, respectively, in 1997. General and administrative expenses
totaled $4.8 million in 1998 versus $3.6 million in 1997. This increase in
costs includes approximately $1.1 million pertaining to write-offs and other
unusual charges as discussed below. The actual increase in general and
administrative costs before write-offs and other unusual charges was
approximately $124,000, or 3%, over 1997. The Company plans to continue
reducing operating and administrative expenses relative to revenues in 1999 in
order to improve profitability from its operations.
The Company recorded $15,000 of net interest and other income in fiscal
1998 versus $257,000 in 1997. This is the result of the liquidation of
investments considered susceptible to increased market risk, and from increased
interest costs from the Company's use of a margin line of credit during 1998,
offset partially by increased interest income.
The Company's income tax expense for 1998 was $263,000 versus $204,000 in
1997. Taxes for 1998 consisted largely of state tax obligations, primarily in
South Carolina and additional federal income taxes related to a prior
acquisition. Income taxes, in 1997, were primarily federal and state income
taxes paid by Darlington Music Company prior to acquisition by the Company, in
addition to state income taxes related to the Company's other subsidiaries.
As a result of management's operational and asset reviews during 1998, the
Company recorded approximately $4 million of asset write-downs and other charges
as follows:
Asset write-offs recorded in 1998 consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Write-offs related to idle or unprofitable bingo centers:
Leasehold improvements $ 660,000
Goodwill 436,000
Future operating lease obligations 555,000
Discontinued "8-Liner" gaming machines 204,000
----------
Total asset write-offs 1,855,000
----------
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Other significant unusual charges recorded in 1998 include the following:
<S> <C>
Uncollectible bingo advances, deposits and receivables 1,054,000
Allowance for doubtful bingo accounts receivable 110,000
Uncollectible gaming advances, deposits and receivables 87,000
Expense recognition for company stock warrants issued in
February 1998 for consulting and investment banking services 221,000
Previously capitalized legal, financial relations costs,
and realized, unrecognized investment losses 340,000
Travel, recruiting and personnel costs due to relocations 370,000
----------
Total unusual charges 2,182,000
----------
Total write-offs and charges $4,037,000
==========
</TABLE>
The Company recorded write-offs for impairment of goodwill and leasehold
improvements of $1.1 million, write-offs of future operating lease obligations
related to idle or unprofitable bingo centers of $555,000 ($273,000 of this
amount is for 1998 lease obligations and $282,000 for post l998 lease
obligations) and write-offs and provisions for doubtful accounts of $1.2
million. The asset write-offs increased general and administrative expenses by
$204,000. The unusual charges increased general and administrative expenses by
$931,000.
COMPARISON OF FISCAL 1997 TO FISCAL 1996 (Note: Fiscal 1997 and 1996 results
have been restated to incorporate the historical financial operations of Gold
Strike, Lucky 4 and Darlington Music Company from 1997 pooled acquisitions).
Revenues
- --------
Total revenues increased by 58% to $12.2 million in fiscal 1997 from $7.7
million in fiscal 1996. Approximately $8.9 million, or 72%, of 1997 revenues
was generated by the Company's South Carolina video gaming operations, versus
$5.0 million, or 65%, in 1996. Approximately $2.9 million, or 24%, of 1997
revenues was comprised of charitable bingo rental payments, paper sales and
promoter fees, as compared to $2.5 million, or 32%, in 1996. The balance of
revenues for each year was comprised of paper, supplies, vending, concessions
and other sales.
Costs and Expenses
- --------------------
Total costs and expenses were $11.0 million in fiscal 1997 as compared to
$7.3 million in fiscal 1996, an increase of 50%, which was less than the
Company's 58% revenue growth in 1997. Salaries and other compensation totaled
$2.0 million in 1997 versus $900,000 in 1996, up largely due to the significant
expansion of the Company's labor-intensive freestanding video gaming business in
South Carolina in 1997. Rent and utilities totaled $1.9 million in 1997 versus
$1.1 million in 1996, up due to the increase in the number of bingo and gaming
centers under lease. Direct operating costs totaled $1.6 million in 1997 versus
$1.4 million in 1996. Depreciation and amortization totaled $2.0 million in
fiscal 1997 versus $1.4 million in fiscal 1996. This increase was primarily due
to increased video gaming license amortization from the Company's expansion in
the South Carolina video gaming markets. The Company added over $2.0 million in
video gaming licenses, and $3.6 million in asset acquisitions, improvements, and
capitalized costs in 1997, which significantly increased amortization and
depreciation costs. General and administrative expenses totaled $3.6 million in
1997 versus $2.6 million in 1996. These costs increased due to the significant
expansion of the Company's gaming business.
16
<PAGE>
The Company recorded $257,000 of net interest and other income in fiscal
1997 versus $726,000 in 1996. Fiscal 1996 included a favorable write-off of
$865,000 of Florida acquisition liabilities no longer deemed an obligation
offset by $417,000 of write-offs for asset impairments of the Company's South
Texas operations.
The Company's income tax expense for 1997 was $204,000 versus $73,000 in
1996. Tax loss carryforwards from 1994 and 1995 significantly reduced income
tax expense in 1997 and 1996. Taxes for 1997 were led by income taxes paid by
Darlington Music Company prior to acquisition by the Company. Management
expects taxes to increase in the future assuming the generation of taxable
income and depletion of tax loss carryforwards.
Fiscal 1997 results included an extraordinary benefit of approximately
$602,000 ($398,000 net of taxes) for the reduction of a note payable to the
former operator of the Company's South Carolina properties. In addition, this
gain was offset by expenses related to write-offs of capitalized start-up costs
for South Carolina investments of over $400,000 from the early adoption of a new
accounting policy requiring immediate expensing of start-up costs.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $4 million at the end of 1998. Cash at
December 31, 1998 represented approximately 21% of the Company's total assets of
$19.0 million. Cash decreased in 1998 compared to 1997 primarily due to the
conversion of previously outstanding preferred stock issued in 1997 and related
cash payments of $1.1 million, repurchase of approximately 360,000 treasury
shares for $1.1 million, payoff of a margin line of credit of $1.5 million, and
other operational and reorganization expenses. The Company's liquidity also
decreased during 1998 as the result of three bingo acquisition transactions in
which the Company used $3.4 million in cash. The Company invested $2.5 million
in property and equipment in 1998. Cash flows from operational activities
totaled $800,000 in 1998 versus $1.2 million in 1997.
Cash used in investing activities totaled $5.8 million in 1998 as compared
to $2.5 million in 1997. Cash used in investing activities was principally $2.5
million related to equipment purchases, $3.4 million for bingo center
acquisitions and $500,000 used in connection with notes receivable, offset by
$400,000 from the sale of property and equipment.
Cash used in financing activities totaled $3.0 million in 1998 compared to
cash provided by financing activities of $11.9 in 1997. The principle source in
1997 was a warrant call of 2.3 million common stock purchase warrants in
December 1997 that grossed $11.5 million and netted $11.1 for the Company. Cash
used related to financing activities in 1998 included $1.1 million in Company
treasury stock purchases, $1.1 million paid in connection with preferred stock
conversions, $100,000 for preferred stock dividends paid, and $800,000 in net
cash paid to reduce notes payable and capital lease obligations. Cash received
related to financing activities also includes $50,000 related to stock options
which were exercised and stock purchases under the Employee Stock Purchase Plan.
At December 31, 1998, the Company had $19.0 million in total assets with
total liabilities of less than $2.9 million and $16.0 million of shareholders'
equity. Total assets include $4.0 million in cash, $1.7 million of net accounts
and notes receivable, $6.3 million of property and equipment, $4.8 million of
intangible assets, $1.5 million in prepaid video gaming licenses and $700,000 of
other prepaid and other assets. Total liabilities primarily consist of note and
capital lease obligations of $2.3 million.
The Company's ongoing operational funding requirements include video gaming
licenses on new and existing machines which are funded by cash at a cost of
$4,000 for a two year license and is required for each of the Company's VGMs.
There are currently no additional taxes on VGMs in South Carolina, although it
is possible that variable taxes may be implemented in the future to replace or
modify the current licensing structure. The operating lease obligations of the
Company's bingo segment will continue to use cash derived from operations and
the Company expects to renegotiate existing leases where possible and to
structure future lease obligations consistent with expected future cash flows
from the leased center's operations and fair market rental rates.
The Company estimates that it will invest $5.3 million for capital
expenditures relating to its existing operations in 1999. Approximately $1.9
million will be invested into computer hardware and software products and
applications to expand and enhance its financial software applications and to
convert its video gaming reporting system to comply with South Carolina's
17
<PAGE>
impending on-line system. The Company will continue to invest in additional
video game machines and has planned to spend over $800,000 for these capital
purchases. Approximately $2.4 million will be invested in gaming license
renewals and increases. Funding for these capital expenditures will be from
cash on-hand as well as from cash provided by operating activities and financing
arrangements.
The Company also intends to invest in the continued growth and
diversification of its business venues. The Company intends to expand within
the video gaming and charitable bingo markets and continue to evaluate
acquisition opportunities on an ongoing basis. As with the Company's prior
acquisitions, funding for these acquisitions, as determined by the nature of
each acquired business or entity, will be with cash, common stock, notes payable
or a combination thereof. The Company is also considering establishing a line
of credit specifically directed toward acquisition funding.
NEW ACCOUNTING STANDARDS
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"), Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131") and Statement of Financial Accounting
Standards No. 132, "Employers' Disclosure about Pensions and Other
Post-Retirement Benefits - an amendment to FASB Statement No. 87, 88 and 106"
("SFAS 132"). Adoption of these statements had no effect on the Company's
consolidated financial position or results of operations.
Recent pronouncements of the Financial Accounting Standards Board ("FASB")
which are not required to be adopted at this date include, Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for fiscal quarters
of all fiscal years beginning after June 15, 1999. Based upon current data the
adoption of this pronouncement is not expected to have a material impact on the
Company's consolidated financial statements.
YEAR 2000 ISSUE
This issue is the result of computer programs that have been written using
two digits rather than four to define the applicable year. Any of the Company's
programs that have time-sensitive software may recognize a date using "00" as
the year rather than the year 2000 resulting in system failures or
miscalculations. Management has conducted a comprehensive review of its computer
systems to identify potential problems that could be caused by the Year 2000
issue. Management believes that, with an upgrade to its existing financial
software, the Year 2000 issue will not pose significant operational problems for
the Company's computer systems or result in significant costs to become Year
2000 compliant. The upgrade to the financial software is provided under the
18
<PAGE>
Company's existing maintenance contract and is scheduled for installation after
the close of the first quarter of 1999. Furthermore, as a result of compliance
with South Carolina's reporting requirements for VGMs, the Company has required
suppliers of that equipment to provide certification of Year 2000 compliance.
Other than these reporting requirements, the VGMs are not date dependent or
driven and therefore do not present a Year 2000 issue. However, if the Company'
computer systems or equipment were subject to undetected system failures or
operational problems resultant from the Year 2000 issue, there can be no
assurance that any one or more such failures would not have a material adverse
effect on the Company. The Company is currently in the process of certifying
that the vendors and suppliers of its critical components and services are Year
2000 compliant and the Company expects certification to be completed by April
1999. The Company will rely on Year 2000 compliance on the part of public
utility providers and all state and local regulatory agencies, although
non-compliance could materially adversely affect the Company's operations and
financial condition.
ITEM 7 - FINANCIAL STATEMENTS
- ---------------------------------
The independent auditors' report, consolidated financial statements and
notes thereto included on the following pages are incorporated herein by
reference.
<TABLE>
<CAPTION>
<S> <C>
Report of King Griffin & Adamson P.C. F- 2
Consolidated Balance Sheet F- 3
Consolidated Statements of Operations F- 4
Consolidated Statements of Stockholders' Equity F- 5
Consolidated Statements of Cash Flows F- 6 - F- 7
Notes to Consolidated Financial Statements F- 8 - F- 29
Schedule II-Valuation and Qualifying Accounts F- 30
</TABLE>
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- --------------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- ---------------------
None
PART III
ITEM 9 - DIRECTORS AND EXECUTIVE OFFICERS; COMPLIANCE WITH SECTION 16(A) OF THE
- --------------------------------------------------------------------------------
EXCHANGE ACT
- -------------
In response to this item, the information included on pages 2 through 4 and
pages 7 through 8 of the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 27, 1999 is incorporated herein by reference.
ITEM 10 - EXECUTIVE COMPENSATION
- ------------------------------------
In response to this item, the information included on pages 4 through 7 of
the Company's Proxy Statement for the Annual Meeting of Stockholders to be held
on May 27, 1999 is incorporated herein by reference.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- --------------------------------------------------------------------------------
In response to this item, the information included on pages 8 through 9 of
the Company's Proxy Statement for the Annual Meeting of Stockholders to be held
on May 27, 1999 is incorporated herein by reference.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ---------------------------------------------------------------
In response to this item, the information included on pages 9 through 10 of
the Company's Proxy Statement for the Annual Meeting of Stockholders to be held
on May 27, 1999 is incorporated herein by reference.
19
<PAGE>
ITEM 13 - EXHIBITS, LISTS AND REPORTS ON FORM 8-K
- ----------------------------------------------------------
EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT # DESCRIPTION
<C> <S>
3.1 Certificate of Incorporation of the Company dated September 8, 1994, as amended October 17,
1994, and further amended July 31, 1997 and August 13, 1998.
3.2 Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 of the
Quarterly Report on Form 10-QSB filed by the Company on August 14, 1998 for the quarter
ended June 30, 1998).
4.1 Rights Agreement dated August 4, 1998, between the Company and American Stock Transfer &
Trust Company (incorporated by reference to Exhibit 1 of the Registration Statement on Form 8-
A filed by the Company on August 13, 1998).
4.2 Form of Subscription Agreement used in connection with issuance of Series A Convertible
Preferred Stock to Plazacorp Investments Limited, P.R.I.F. #4, David Heller and Sam Reisman
on August 1, 1997.
10.1* Amended and Restated 1994 Stock Option Plan.
10.2* Amended and Restated 1995 Employee Stock Option Plan.
10.3* 1995 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.12 of the Annual
Report on Form 10-KSB filed by the Company for the year ended December 31, 1994).
10.4* Amended and Restated 1996 Employee Stock Option Plan.
10.5* Amended and Restated 1997 Stock Option Plan (incorporated by reference to Exhibit 10.5 of
the Quarterly Report on Form 10-QSB filed by the Company on August 14, 1998 for the quarter
ended June 30, 1998).
10.6 Agreement and Plan of Reorganization dated August 13, 1997, by and among the Company,
Gold Strike Acquisition Corporation, Gold Strike, Inc. and Michael W. Mims (incorporated by
reference to Exhibit 10.6. of the Quarterly Report on Form 10-QSB filed by the Company on
August 14, 1998 for the quarter ended June 30, 1998).
10.7 Agreement and Plan of Reorganization dated November 12, 1997, by and among the Company,
Darlington Music Acquisition Corporation, Darlington Music Co., Inc. and George M. Harrison,
Jr., Thomas M. Harrison and William W. Harrison (incorporated by reference to Exhibit 10.7 of
the Quarterly Report on Form 10-QSB filed by the Company on August 14, 1998 for the quarter
ended June 30, 1998).
20
<PAGE>
10.8 Acquisition Agreement dated October 30, 1998 by and between the Company and Gary Mike
Ehler, for the acquisition of Strike It Rich Bingo, Inc. (excluding the Exhibits thereto, which the
Company shall submit supplementally if requested by the SEC), which Acquisition Agreement is
the same form of contract used for the acquisition by the Company from Gary Mike Ehler of
The Samaritan Associates, Inc., Meeks Management Company, Lavaca Enterprises,
Incorporated, Lucky Bingo, Inc., and Parkway Bingo, Inc. (incorporated by reference to Exhibit
2.1 of the Quarterly Report on Form 10-QSB filed by the Company on November 12, 1998 for
the quarter ended September 30, 1998). Attached to the Acquisition Agreement is a schedule
summarizing the significant differences between this Acquisition Agreement and the Acquisition
Agreements used for the acquisition of the other five entities.
10.9* Employment Agreement dated December 18, 1997 with George M. Harrison, Jr., as amended
February 25, 1998 and as further amended July 27, 1998 (incorporated by reference to Exhibit
10.13 of the Quarterly Report on Form 10-QSB filed by the Company on August 14, 1998 for
the quarter ended June 30, 1998).
10.10* Employment Agreement dated April 30, 1998 with Andre Marc Hilliou (incorporated by
reference to Exhibit 10.14 of the Quarterly Report on Form 10-QSB filed by the Company on
August 14, 1998 for the quarter ended June 30, 1998).
10.11* Employment Agreement dated June 19, 1998 with Richard M. Kelley, as amended October 23,
1998.
10.12* Employment Agreement dated September 28, 1998 with Marie T. Pierson (incorporated by
reference to Exhibit 10.3 of the Quarterly Report on Form 10-QSB filed by the Company on
November 12, 1998 for the quarter ended September 30, 1998).
10.13* Employment Agreement dated November 2, 1998 with Nancy Pollick.
10.14* Consulting Agreement dated November 9, 1998 with Michael W. Mims.
10.15 Mutual Release and Settlement Agreement dated July 24, 1998 with L. Gregory Wilson
(incorporated by reference to Exhibit 99.2 of the Current Report on Form 8-K filed by the
Company on August 4, 1998).
10.16 Severance Agreement dated July 24, 1998 with L. Gregory Wilson (incorporated by reference to
Exhibit 99.3 of the Current Report on Form 8-K filed by the Company on August 4, 1998).
10.17 Settlement Agreement, Compromise of Claims and Mutual Release dated February 26, 1999, by
and among Gregory Wilson, Sally Stewart Wilson, Linda Bussey, the Linda Bussey Irrevocable
Trust, Len Bussey, Barbara Wilson and the Company (incorporated by reference to Exhibit 99.1
of the Current Report on Form 8-K filed by the Company on March 4, 1999).
10.18 Promissory Note dated February 24, 1998, with George M. Harrison, Jr. (incorporated by
reference to Exhibit 10.20 of the Quarterly Report on Form 10-QSB filed by the Company on
August 14, 1998 for the quarter ended June 30, 1998).
10.19 Promissory Note and Security Agreement dated June 4, 1998 with Michael W. Mims
(incorporated by reference to Exhibit 10.19 of the Quarterly Report on Form 10-QSB filed by
the Company on August 14, 1998 for the quarter ended June 30, 1998).
10.20 Master Coin Machine Agreement dated November 9, 1998, by and among the Company, Gold
Strike, Inc., Mims & Dye Enterprises, LLC, Michael W. Mims and Danny C. Dye.
21
<PAGE>
10.21 Promissory Note dated November 9, 1998, between Gold Strike, Inc. and Mims & Dye
Enterprises, LLC.
10.22 Guaranty Agreement dated November 9, 1998 with Michael W. Mims and Danny C. Dye.
10.23 Promissory Note dated February 18, 1999 between the Company and Mims & Dye Enterprises,
LLC.
10.24 Settlement Agreement dated January 27, 1997 with the State of Florida (incorporated by
reference to Exhibit 10.21 of the Quarterly Report on Form 10-QSB filed by the Company on
August 14, 1998 for the quarter ended June 30, 1998).
10.25 Form of Stock Purchase Warrant used in connection with warrant grant to Gaines Berland, Inc.,
Peter Blum, Steven Blumberg and Lisa Evanchuk on February 6, 1998.
10.26 Form of Common Stock Purchase Warrant used in connection with issuance of Series A
Convertible Preferred Stock to Plazacorp Investments Limited, P.R.I.F. #4, David Heller and
Sam Reisman on August 1, 1997.
10.27 Form of Registration Rights Agreement used in connection with issuance of Series A
Convertible Preferred Stock to Plazacorp Investments Limited, P.R.I.F. #4, David Heller and
Sam Reisman on August 1, 1997.
11.1 Computation of Earnings Per Share.
21.1 Subsidiaries of the Company.
27.1 Financial Data Schedule (for SEC use only).
* Denotes a management contract or compensatory plan or arrangement.
</TABLE>
REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 1998.
22
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Dated: March 15, 1999
AMERICAN BINGO & GAMING CORP.
---------------------------------
(Registrant)
By: /s/ Andre M. Hilliou
---------------------------------
Andre M. Hilliou
Chairman of the Board, President and Chief
Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------- -------------------------------- --------------
<S> <C> <C>
/s/ Andre M. Hilliou Chairman of the Board, President
- ---------------------------
Andre M. Hilliou and Chief Executive Officer March 15, 1999
/s/ Richard M. Kelley Vice President, Treasurer and
- ---------------------------
Richard M. Kelley Chief Financial Officer March 15, 1999
/s/ George M. Harrison, Jr. Vice Chairman of the Board and
- ---------------------------
George M. Harrison, Jr. Vice President March 05, 1999
/s/ James L. Hall
- ---------------------------
James L. Hall Director March 15, 1999
/s/ A. Joe Willis
- ---------------------------
A. Joe Willis Director March 07, 1999
/s/ Grover C. Seaton III
- ---------------------------
Grover C. Seaton III Director March 08, 1999
/s/ Michael W. Mims
- ---------------------------
Michael W. Mims Director March 11, 1999
</TABLE>
23
<PAGE>
AMERICAN BINGO & GAMING CORP. AND SUBSIDIARIES
DECEMBER 31, 1998
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Page No
- ---------------------------------------------------- -----------
<S> <C>
INDEPENDENT AUDITORS' REPORT F-2
FINANCIAL STATEMENTS:
Consolidated Balance Sheet as of December 31, 1998 F-3
Consolidated Statements of Operations
Years Ended December 31, 1998 and 1997 F-4
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1998 and 1997 F-5
Consolidated Statements of Cash Flows
Years Ended December 31, 1998 and 1997 F-6 - F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8 - F-29
SCHEDULE II - Valuation and Qualifying Accounts F-30
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors
American Bingo & Gaming Corp.
We have audited the accompanying consolidated balance sheet of American Bingo &
Gaming Corp. and Subsidiaries as of December 31, 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1998 and 1997. Our audits also included the
financial statement schedule listed in the Index at F-1. These consolidated
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
stan-dards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial statements
are free of mate-rial misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant esti-mates made by management, as well as evaluating the overall
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 financial position of American Bingo &
Gaming Corp. and Subsidiaries as of December 31, 1998, and the results of their
operations and their cash flows for the years ended December 31, 1998 and 1997,
in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ King Griffin & Adamson P.C.
- ------------------------------------
King Griffin & Adamson P.C.
Dallas, Texas
February 12, 1999
F-2
<PAGE>
<TABLE>
<CAPTION>
AMERICAN BINGO & GAMING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
ASSETS
------
<S> <C>
Current Assets:
Cash and cash equivalents $ 3,953,401
Accounts receivable net of allowance for
doubtful accounts of $109,595 379,396
Notes receivable - current portion ($81,999 to related parties),
net of allowance for doubtful accounts of $195,595 464,260
Prepaid license expense - current portion 1,059,628
Other prepaid expenses 542,105
------------
Total Current Assets 6,398,790
------------
Property and Equipment - at cost, net of accumulated
depreciation and amortization 6,257,849
Other Assets:
Notes receivable, net of current portion ($468,654 to related parties) 876,631
Prepaid license expense, net of current portion 439,764
Intangible assets, net 4,837,874
Other non-current assets 171,664
------------
Total Other Assets 6,325,933
------------
TOTAL ASSETS $18,982,572
============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------
Current Liabilities:
Notes payable - current portion $ 846,211
($93,199 to related parties)
Capital leases payable - current portion 411,891
Trade accounts payable 140,310
Accrued expenses and other current liabilities 398,928
------------
Total Current Liabilities 1,797,340
------------
Long-term Liabilities:
Notes payable, net of current portion
($248,689 to related parties) 942,793
Capital leases payable, net of current portion 147,405
------------
Total Long-term Liabilities 1,090,198
------------
Stockholders' Equity:
Common stock, $.001 par value,
authorized 20,000,000 shares,
issued 9,849,582 shares 9,850
Additional paid-in-capital 23,166,076
Treasury stock - 231,300 shares (686,399)
Accumulated deficit (6,394,493)
------------
Total Stockholders' Equity 16,095,034
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $18,982,572
============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
AMERICAN BINGO & GAMING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended
December 31,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
REVENUES:
Video gaming $ 9,738,085 $ 8,874,257
Bingo 4,855,532 2,921,386
Other 851,839 427,492
------------ ------------
TOTAL REVENUES 15,445,456 12,223,135
------------ ------------
COSTS AND EXPENSES:
Direct salaries and other compensation 2,150,424 2,028,874
Rent and utilities ($105,240 and $76,930 to related parties) 2,352,043 1,851,228
Direct operating costs 2,375,751 1,586,824
Depreciation and amortization 2,087,477 1,103,952
License expense 1,398,636 852,317
Write-offs of future operating lease obligations
related to idle or unprofitable bingo centers 282,270 -
Write-offs and provisions for doubtful accounts 1,202,467 -
Write-offs for impairment of goodwill and leasehold improvements 1,109,845 -
General and administrative 4,838,085 3,568,915
------------ ------------
TOTAL COSTS AND EXPENSES 17,796,998 10,992,110
------------ ------------
OPERATING INCOME (LOSS) (2,351,542) 1,231,025
OTHER INCOME AND EXPENSES:
Interest and investment income ($34,000 and $0 from related parties) 518,400 115,301
Interest expense ($23,201 and $0 to related parties) (313,206) (47,113)
Other income and (expense) (190,730) 189,331
------------ ------------
TOTAL OTHER INCOME AND EXPENSES 14,464 257,519
NET INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES
AND EXTRAORDINARY ITEM (2,337,078) 1,488,544
PROVISION FOR INCOME TAXES 263,144 203,688
------------ ------------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (2,600,222) 1,284,856
EXTRAORDINARY ITEM:
Gain on extinguishment of debt of $602,327,
net of income taxes of $204,791 --- 397,536
------------ ------------
NET INCOME (LOSS) $(2,600,222) $ 1,682,392
============ ============
EARNINGS PER SHARE:
Basic
Net income (loss) before extraordinary item $ (.29) $ .17
Extraordinary item --- .06
------------ ------------
Net income (loss) $ (.29) $ .23
============ ============
Diluted
Net income (loss) before extraordinary item $ (.29) $ .16
Extraordinary item --- .05
------------ ------------
Net income (loss) $ (.29) $ .21
============ ============
Weighted average shares outstanding - basic 9,299,908 7,160,612
Weighted average shares outstanding - diluted 9,299,908 8,133,786
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
AMERICAN BINGO & GAMING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Addtl.
Addtl. Paid-in
- Common Stock - Paid-in Capital- Treasury Preferred
Description Shares Value Capital Warrants Stock Stock
- ------------------------------------------- ----------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at 1/1/97 6,792,622 $ 6,348 $10,024,002 $ 1,026,750
Issuance of common stock pursuant to
Employee Stock Purchase Plan 10,767 11 20,439
Issuance of common stock for services 74,000 74 86,871
Issuance of common stock for stock
purchase agreement 300,000 300 205,950
Exercise of employee stock options 200,000 200 347,133
Issuance of common stock to employees 50,000 50 46,825
Subsidiary owner distributions
Purchase of subsidiary treasury stock (444,448) (651,300)
Issuance of preferred stock 1,829,880 20
Issuance of common stock for purchase
of bingo halls 9,969 10 49,990
Preferred dividends paid in cash
Redemption of warrants 2,293,995 2,294 12,150,332 (1,026,750)
Net income for the year ended 12/31/97
----------- ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1997 9,286,905 9,287 24,110,122 --- --- 20
----------- ------------ ------------ ------------ ------------ ------------
Issuance of common stock pursuant to
Employee Stock Purchase Plan 2,381 2 6,071
Issuance of warrants for services 221,616
Exercise of employee stock options 33,733 34 38,934
Cancellation of common stock (1,666) (2) 2
Redemption of preferred stock and preferred
stock dividends for cash and issuance of
common stock 498,599 499 (1,063,182) (20)
Preferred dividends paid in cash
Repurchase and cancellation of warrants
and other warrant costs (48,561)
Issuance of common stock for purchase
of bingo halls 29,630 30 89,970
Repurchase of common stock under stock
buyback program (359,300) (1,075,295)
Purchase of bingo halls with treasury stock 128,000 (188,896) 388,896
Net loss for the year ended 12/31/98
----------- ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1998 9,618,282 $ 9,850 $23,166,076 --- $ (686,399) ---
=========== ============ ============ ============ ============ ============
Accumulated
Description Deficit Total
- ------------------------------------------- ------------ -----------
<S> <C> <C>
Balance at 1/1/97 $(4,941,637) $ 6,115,463
Issuance of common stock pursuant to 20,450
Employee Stock Purchase Plan
Issuance of common stock for services 86,945
Issuance of common stock for stock 206,250
purchase agreement
Exercise of employee stock options 347,333
Issuance of common stock to employees 46,875
Subsidiary owner distributions (402,169) (402,169)
Purchase of subsidiary treasury stock (651,300)
Issuance of preferred stock 1,829,900
Issuance of common stock for purchase
of bingo halls 50,000
Preferred dividends paid in cash (35,000) (35,000)
Redemption of warrants 11,125,876
Net income for the year ended 12/31/97 1,682,392 1,682,392
------------ -----------
Balance at December 31, 1997 (3,696,414) 20,423,015
------------ -----------
Issuance of common stock pursuant to
Employee Stock Purchase Plan 6,073
Issuance of warrants for services 221,616
Exercise of employee stock options 38,968
Cancellation of common stock ---
Redemption of preferred stock and preferred
stock dividends for cash and issuance of
common stock (1,983) (1,064,686)
Preferred dividends paid in cash (95,874) (95,874)
Repurchase and cancellation of warrants
and other warrant costs (48,561)
Issuance of common stock for purchase
of bingo halls 90,000
Repurchase of common stock under stock
buyback program (1,075,295)
Purchase of bingo halls with treasury stock 200,000
Net loss for the year ended 12/31/98 (2,600,222) (2,600,222)
------------ -----------
Balance at December 31, 1998 $(6,394,493) $16,095,034
============ ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
AMERICAN BINGO & GAMING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITES:
Net income (loss) $(2,600,222) $ 1,682,392
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Write-off of long-lived assets 1,349,862 ---
Depreciation and amortization 2,087,477 926,481
Provision for uncollectible receivables 109,595 ---
Loss (gain) on disposal of property and equipment 858,397 (158,903)
Compensation for common stock and warrant issues 221,616 133,822
Gain on debt extinguishment --- (602,327)
Increase (decrease) in cash flows as a result of changes in
asset and liability account balances:
Accounts receivable 89,913 (444,767)
Prepaid licenses (50,551) (622,967)
Other prepaid expenses and current assets (396,802) (47,863)
Trade accounts payable (72,023) 24,321
Accrued expenses and other current liabilities (775,568) 310,439
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITES 821,694 1,200,628
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions (3,360,000) ---
Intangible expenditures --- (909,768)
Property and equipment expenditures (2,539,630) (1,364,839)
Repayments of notes receivable ($81,999 and $0 from related parties) 246,540 190,505
Issuance of notes receivable ($281,786 and $245,996 to related parties) (498,391) (355,782)
Reductions of notes receivable allowance (35,800) (58,978)
Proceeds from sale of property and equipment 420,135 ---
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (5,767,146) (2,498,862)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations (404,945) (346,735)
Payments on notes payable ($62,931 and $0 from related parties) (916,505) (526,316)
Proceeds from notes payable 520,833 100,000
Proceeds from issuance of common stock --- 367,783
Proceeds from warrant call, net of conversion costs --- 11,125,876
Repurchase and cancellation and other warrant costs (48,561) ---
Purchase and cancellation of subsidiary treasury stock --- (251,300)
Purchase of treasury stock (1,075,295) ---
Distribution and dividends to stockholders (95,874) (437,169)
Proceeds from employee stock purchase plan issuances 6,073 ---
Proceeds from options exercises 38,968 ---
Payments related to redemption of preferred stock (1,062,703) ---
Proceeds from issuance of preferred stock --- 1,829,900
------------ ------------
NET CASH PROVIDED (USED) IN FINANCING ACTIVITIES (3,038,009) 11,862,039
------------ ------------
NET INCREASE (DECREASE) IN CASH (7,983,461) 10,563,805
CASH AT BEGINNING OF YEAR 11,936,862 1,373,057
------------ ------------
CASH AT END OF YEAR $ 3,953,401 $11,936,862
============ ============
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
AMERICAN BINGO & GAMING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years Ended
December 31,
--------------------
1998 1997
-------- ----------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments:
Interest $313,206 $ 47,113
======== ==========
Income taxes $624,889 $ 442,005
======== ==========
Non-cash transactions:
Issuance of common stock and warrants for employment, services,
and consulting fees $221,616 $ 133,822
======== ==========
Acquisition of business in exchange for note payable
($400,000 and $0 from related parties) $400,000 $ 400,000
======== ==========
Acquisition of property and equipment in exchange
for notes payable $439,007 $1,093,140
======== ==========
Gain on extinguishment of debt $ --- $ 602,327
======== ==========
Acquisition of property under capital leases $ --- $1,235,812
======== ==========
Acquisition of businesses in exchange for common stock $290,000 $ 256,250
======== ==========
Purchase of treasury stock through asset distribution $ --- $ 400,000
======== ==========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
AMERICAN BINGO & GAMING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
American Bingo & Gaming Corp. actively participates in the non-casino gaming
market and U.S. Charitable bingo market. The Company's corporate headquarters
is located in West Columbia, South Carolina, and the Company operates primarily
through wholly owned subsidiaries in South Carolina, Texas and Alabama. The
Company generates the majority of its revenues from video gaming operations in
South Carolina, and also earns revenues from bingo centers in all three states.
PRINCIPLES OF CONSOLIDATION:
- -----------------------------
The accompanying consolidated financial statements include the accounts of
American Bingo & Gaming Corp. and its subsidiaries (herein collectively referred
to as the "Company"). All significant intercompany accounts and transactions
have been eliminated on consolidation.
RECLASSIFICATIONS:
- -----------------
Certain items in the financial statements have been reclassified to maintain
consistency and comparability for all periods presented herein.
MANAGEMENT ESTIMATES:
- ---------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, as
well as the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS:
- ----------------------------
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. Cash is at risk to the
extent that it exceeds Federal Deposit Insurance Corporation insured amounts
(approximately $2 million at December 31, 1998). To minimize concentration and
credit risk, the Company places its cash with high credit quality institutions.
ACCOUNTS RECEIVABLE:
- --------------------
Accounts receivable consist principally of amounts due from charitable
organizations which conduct bingo events at the Company's various bingo centers,
and are generally payable within one month of the event. Receivables also
include rent due from operators of concessions located within bingo centers.
Video gaming receivables generally consist of temporary advances in connection
with video gaming route locations. Accounts receivable are not secured.
Management provides an allowance for doubtful accounts, which reflects its
estimate of the uncollectable receivables. In the event of non-performance, the
maximum exposure to the Company is the recorded amount of receivables, net of
allowance for doubtful accounts, at the balance sheet date.
F-8
<PAGE>
AMERICAN BINGO & GAMING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED).
PREPAID LICENSES:
- -----------------
Prepaid licenses consist of video gaming, bingo and other operational licenses
which are reviewed periodically to ensure their continued usefulness and ongoing
commercial value. Video gaming licenses, the largest component of the Company's
prepaid licenses, are required for the Company to operate its South Carolina
video gaming machines. Video gaming licenses currently cost $4,000 per license
for a two-year period, and are expensed over this period. The value of such
licenses can be affected by regulatory issues and changes. The Company has
recorded the net unrealized cost of its licenses as prepaid assets.
PROPERTY AND EQUIPMENT:
- ------------------------
The cost of equipment, furniture and fixtures is depreciated over the estimated
useful lives of the assets ranging from four to seven years, using the
straight-line method. Leasehold improvements are amortized over the lesser of
the term of the lease or the esti-mated useful lives. The buildings are
amortized over thirty-nine years, which approximates their estimated useful
lives. Building improvements are amortized over their estimated useful lives
ranging from seven to fifteen years. Upon sale, retirement or abandonment of
assets, the related cost and accumulated deprecia-tion are eliminated from the
accounts and gains or losses are re-flected in income. Repairs and maintenance
expenditures, which do not extend asset lives, are expensed as incurred.
INTANGIBLE ASSETS:
- ------------------
Intangible assets, which primarily consist of goodwill and non-compete covenants
resulting from the acquisition of bingo entities, are periodically reviewed by
management to evaluate the future economic benefits or potential impairments,
which may affect their recorded values. Goodwill, which represents the excess
of the cost of assets acquired over the fair market value of those tangible
assets on the date of their acquisition, is amortized over various periods
ranging from three to ten years, consistent with the estimated useful life of
the goodwill. Non-compete covenants are amortized over the periods of the
stated benefits, ranging from one to five years, and are monitored for
contractual compliance. If the projected undiscounted future cash flows related
to the intangible assets are less than the recorded value, the intangible asset
is written down to fair value.
REVENUE RECOGNITION:
- --------------------
The Company generates revenues from the following sources:
(I) VIDEO GAMING:
Video gaming revenues are recorded from the net "handle" of the Company's
video gaming machines. The net "handle" is the total player spend less prizes
paid by the machines. Video gaming revenues are derived from video gaming
machines in bingo centers, freestanding locations and route operations. The
video gaming revenues are split with route location owners, and operators of
bingo centers and freestanding locations. The Company retains a percentage of
all video gaming revenues generated in accordance with Coin Machine Agreements
between the Company and the owners and operators. Video gaming revenues can
vary depending on customer attendance and spending, games available, and the
timing of prize payouts, which occur at random.
(ii) BINGO:
Bingo rents, paper sales and head tax payments are received from charitable
organizations through various sub-lease agreements of the Company's bingo
centers. Revenues are determined by customer attendance, spending and prize
payouts, as well as state regulations which may dictate the number of bingo
sessions a charity can conduct and rent limits that can be paid to a commercial
lessor, such as the Company.
F-9
<PAGE>
AMERICAN BINGO & GAMING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED).
(iii) OTHER:
Other revenues are earned from gaming license fee collections, concessions,
vending machines, bingo supplies, pool tables and jukebox proceeds, and other
sources.
INCOME TAXES:
- -------------
Deferred income tax assets and liabilities are recognized for the expected
future tax consequences of temporary differences between the tax bases and
financial reporting carrying amounts of assets and liabilities. The Company
periodically evaluates its deferred tax assets and adjusts any related valuation
allowance based on the estimate of the amount of such deferred tax assets which
the Company believes does not meet the "more-likely-than-not" recognition
criteria.
PER SHARE DATA:
- ----------------
Basic earnings (loss) per share of common stock is calculated by dividing income
(loss) from continuing operations by the weighted average number of common
shares actually outstanding during each period. Diluted earnings (loss) per
share of common stock is calculated by dividing net income (loss) by the fully
diluted weighted average number of common shares outstanding during each period,
which includes dilutive stock options and convertible shares.
STOCK BASED COMPENSATION:
- --------------------------
The Company measures compensation cost for its stock based compensation plans
under the provisions of Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees". The difference, if any, between the
fair value of the stock on the date of grant over the exercise price for the
stock is accrued over the related vesting period. SFAS No. 123, "Accounting for
Stock-Based Compensation", ("SFAS 123") requires companies that continue to use
APB 25 to account for its stock-based compensation plan to make pro forma
disclosures of net income (loss) and earnings (loss) per share as if SFAS 123
had been applied (see Note 14).
COMPREHENSIVE INCOME:
- ---------------------
The Company has no components of other comprehensive income. Accordingly, net
income equals comprehensive income for all periods.
NEW ACCOUNTING STANDARDS:
- --------------------------
SFAS No. 133: In June 1998, the Financial Accounting Standards Board issued
Standard No. 133 ("SFAS 133") - "Accounting for Derivative Instruments and
Hedging Activities". SFAS 133 requires companies to record derivatives on the
balance sheet as assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting. SFAS 133 is effective beginning in 2000. The adoption of SFAS 133
is not expected to have a material impact on the financial position or results
of operations of the Company.
SOP 98-5: In April 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
No. 98-5, "Reporting on the Costs of Start-up Activities". This statement is
required to be adopted for fiscal years beginning after December 15, 1998 and
requires the expensing of all start-up costs, as defined, as they are incurred.
The Company has voluntarily applied accounting policies consistent with SOP 98-5
for the years ended December 31, 1998 and 1997.
F-10
<PAGE>
AMERICAN BINGO & GAMING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - MATERIAL ACQUISITIONS, OPENINGS, CLOSINGS AND REORGANIZATIONS.
On December 18, 1998, the Company acquired West Texas Bingo, Inc. for $60,000
cash. At the same time, the Company entered into a three year property lease in
Abilene, Texas, commencing in February 1999. The Company is currently
renovating this lease location and anticipates charitable bingo operations to
begin near the end of the first quarter of 1999. The $60,000 purchase price was
allocated to the fair value of the bingo license. The acquisition has been
accounted for under the purchase method of accounting.
On November 9, 1998, the Company reorganized its South Carolina video gaming
operations. The Company entered into a three year Master Coin Machine Agreement
("Agreement") with a third party operator that served to outsource the
operations of the Company's non-route video gaming operations at eight video
game machine centers. Under the agreement, the Company has agreed to provide
the video game machines to be used at these video game centers and to lease or
sublease such centers to the operator where appropriate. In return, the Company
receives a fixed percentage of the gross revenues earned from these operations.
The operator assumes all financial responsibility and liability for these
operations under the Agreement, while the Company retains all ownership rights
to the underlying video game machines and all related assets.
On October 30, 1998, the Company acquired six bingo centers in Texas. Three of
the centers are in Lubbock, two in Amarillo, and one in Odessa. The total
purchase price for this acquisition was $3.0 million which included $2.8 million
cash and 128,000 shares of the Company's Common Stock valued at $200,000, based
on the closing share price on October 30, 1998. The fair value of assets
acquired and liabilities assumed included net operating assets of $284,640,
goodwill of $2,515,360 and non-compete agreements of $200,000. The acquisitions
have been accounted for under the purchase method of accounting.
On March 25, 1998, the Company acquired Ambler Bingo, a bingo center in Abilene,
Texas. Total consideration for the acquisition was $990,000, and included
$500,000 cash, $400,000 of notes, and 29,630 shares of Company Common Stock
valued at $90,000 based on the closing price on March 25, 1998. The fair value
of assets acquired and liabilities assumed resulted in net operating assets of
$31,923, goodwill of $833,077, and a non-compete agreement of $125,000. The
acquisition has been accounted for under the purchase method of accounting.
Unaudited pro forma financial information for the years ended December 31, 1998
and 1997, as though the Ambler and the six Texas halls acquisitions had occurred
January 1, 1997, is as follows:
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Revenues $16,969,657 $14,185,556
============ ===========
Net income (loss) $(2,049,043) $ 1,942,762
============ ===========
Basic earnings (loss) per share $ (.22) $ .27
============ ===========
</TABLE>
At the end of 1997, the Company closed its double bingo center in Brownsville,
Texas and sublet the property to a federal government agency for the balance of
the lease life.
On December 18, 1997, the Company acquired Darlington Music Company, Inc.
("DMC"), a South Carolina video gaming route business. The acquisition was
consummated in a stock-for-stock transaction, with the Company exchanging
1,000,000 shares of its common stock for 100% of the issued and outstanding
shares of DMC. There was no cash or other consideration. This acquisition was
accounted for as a pooling of interests, and DMC's historical financial results
have been combined with the Company's financial results. A principal in this
acquisition is a director of the Company.
F-11
<PAGE>
AMERICAN BINGO & GAMING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - MATERIAL ACQUISITIONS, OPENINGS, CLOSINGS AND REORGANIZATIONS
- ------------------------------------------------------------------------------
(CONTINUED).
- ------------
In November of 1997, the Company cancelled a stock purchase agreement with the
manager of its West Columbia, South Carolina bingo and gaming property due to
poor financial performance and construction cost over-runs on new developments.
The Company and the manager mutually agreed to reduce the Company's note payable
balance to the manager from $657,000 to $100,000, plus past due payments of
$45,000, resulting
in a one-time extraordinary gain of approximately $602,000 for the Company. The
gain on extinguishment of debt is reflected as an extraordinary item net of
income taxes of approximately $205,000. The Company also canceled the
employment agreement with this manager. In exchange, the Company agreed to
reduce the lock-up on this manager's 300,000 shares of Company stock from two
years to one year. The Company retained all other assets acquired in the
original stock purchase agreement. The Company originally entered into this
stock purchase agreement in early 1997, while at the same time acquiring a South
Carolina corporation, related equipment and minority lease ownership rights. In
exchange, the Company provided the manager with $1.0 million of consideration,
including a note for $740,000, 300,000 shares of Company Common Stock valued at
$206,000, and cash of $50,000. The purchase price exceeded the net tangible
asset value acquired, resulting in goodwill of approximately $1,016,000, which
is being amortized on a straight-line basis over five years.
On October 9, 1997, the Company acquired Lucky 4, Inc. ("Lucky 4") a South
Carolina corporation engaged in the video gaming business. This acquisition was
consummated in a stock-for-stock transaction, with the Company exchanging
358,000 shares of its common stock for 100% of the issued and outstanding shares
of Lucky 4. There was no cash or other consideration. This acquisition was
accounted for as a pooling of interests, and Lucky 4's historical financial
results have been combined with the Company's financial results.
In August of 1997 the Company acquired two bingo centers in Charleston, South
Carolina, Beacon I and Beacon II, for cash and stock consideration totaling
$175,000. The Company recorded this acquisition as a purchase. The Company
closed the Beacon II center at the end of 1997 due to lack of profitability.
The Company wrote off the remaining goodwill during 1998 due to poor performance
of Beacon I.
On August 25, 1997, the Company acquired Gold Strike, Inc. ("Gold Strike"), a
South Carolina corporation engaged in the video gaming business. This
acquisition was consummated in a stock-for-stock transaction, with the Company
exchanging 827,680 shares of its common stock for 100% of the issued and
outstanding shares of Gold Strike. There was no cash or other consideration.
This acquisition was accounted for as a pooling of interests, and Gold Strike's
historical financial results have been combined with the Company's financial
results. A principal in this acquisition is a director of the Company.
In June of 1997 the Company acquired four bingo centers in Charleston, South
Carolina. The Company acquired the Lucky, Shipwatch, Ponderosa and Sea Galley
bingo centers for $1.2 million, comprised of $750,000 in cash, $400,000 in
notes, and 9,969 shares of Company stock valued at $50,000. The Company
recorded these acquisitions as purchases. The purchase price exceeded the net
tangible asset value resulting in the recording of goodwill of approximately
$1.0 million, amortized on a straight-line basis over three to five years,
consistent with the remaining property lease periods. The Company subsequently
closed the Sea Galley center due to lack of profitability. During the fourth
quarter of 1998, the Company reassessed the value of the goodwill based on
expected future cash flows. As a result of this analysis, in conjunction with
considered cash flow projections, market and business risks, the Company wrote
off the residual goodwill associated with the Shipwatch and Ponderosa bingo
centers at December 31, 1998. The remaining goodwill, related to the Lucky
bingo center, is not considered to be impaired and will continue to be
amortized, on a straight-line basis, over the remaining property lease period.
All acquisitions accounted for as purchases reflect the operations of the
acquired entities from the respective dates of acquisition. The results of
operations for all entities accounted for as poolings are included for all
periods presented.
F-12
<PAGE>
- ------
AMERICAN BINGO & GAMING CORP. AND SUBSIDIARIES
----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - PROPERTY AND EQUIPMENT.
Property and equipment at December 31, 1998 consists of the following:
<TABLE>
<CAPTION>
<S> <C>
Land $ 189,671
Buildings 379,342
Building and leasehold improvements 2,350,265
Video gaming machines and bingo equipment 7,044,703
Equipment, furniture and fixtures 1,040,743
Automobiles 302,425
------------
11,307,149
Less: Accumulated depreciation and amortization (5,049,300)
------------
Property and equipment, net $ 6,257,849
============
</TABLE>
Property and equipment at December 31, 1998 includes $1.3 million of assets held
under capital leases, related accumulated amortization of $293,000. Related
amortization expense charged to operations for the years ended December 31,
1998 and 1997 was $184,000 and $109,000, respectively.
Depreciation and amortization expense charged to operations for the years ended
December 31, 1998 and 1997 was $1,445,000 and $798,000, respectively.
NOTE 4 - INTANGIBLE ASSETS.
Amortization expense charged to operations for the years ended December 31, 1998
and 1997 was $642,000 and $306,000, respectively.
Intangible assets at December 31, 1998 consists of the following:
<TABLE>
<CAPTION>
<S> <C>
Goodwill $5,095,436
Covenants not to compete 553,891
-----------
5,649,327
Less: Accumulated amortization (811,453)
-----------
Intangible assets, net of accumulated amortization $4,837,874
===========
</TABLE>
F-13
<PAGE>
AMERICAN BINGO & GAMING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - NOTES RECEIVABLE.
<TABLE>
<CAPTION>
<S> <C>
Receivables from the sale of the Company's Florida bingo centers:
- -----------------------------------------------------------------
A promissory note due in equal monthly installments of $21,000 for 6 months of
the year and $11,000 for 6 months of the year, including interest at 12% per
annum, maturing October 2001, secured by certain assets $ 815,514
Various other promissory notes due in monthly installments of $5,400 to $13,300,
including interest at 9% to 12% per annum, due on demand,
secured by certain assets and personal property 47,150
Other Receivables:
- ------------------
A promissory note, with a related party, due on maturity, including interest at 7%
per annum, maturing May 2001, secured by pledged Company common stock 296,353
Three promissory notes, with related parties, due in equal annual installments of
81,999, plus simple interest 8%, maturing May 2001, un-secured 163,997
A promissory note, with a third party, due on maturity, including interest at 10%
per annum, maturing May 1999, secured by personal property 80,667
Various other promissory notes, with third parties, due in monthly installments of
100 to $4,000, including interest at 6% to 10% per annum, maturing from May
1999 to September 2001, secured by personal property 132,805
-----------
1,536,486
Less: Allowance for doubtful accounts (195,595)
-----------
Notes receivable, net of allowance for doubtful accounts $1,340,891
===========
</TABLE>
The financial statements include an allowance for collectibility of the Florida
notes receivable of $195,595. The creditor is depositing note payments into an
escrow account pending resolution of litigation (see Note 16). At December 31,
1998 the amount held in escrow is $126,517. If the Company were unable to
collect on the notes, and is unable to sell the underlying assets at their
estimated fair market value, the amount realized could be substantially less
than net amount of $493,402 (which is the note balance at December 31, 1998 of
$815,514 less the allowance and escrow accounts).
F-14
<PAGE>
AMERICAN BINGO & GAMING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - WRITE-OFFS AND CHARGES.
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" ("SFAS 121"), the Company recognizes impairment losses when
facts and circumstances indicate that the carrying amount of an asset may not be
recoverable. In such cases, the difference between management's estimate of
discounted future cash flows and carrying value of the asset is recorded as an
impairment.
In the second and fourth quarters of 1998, the Company recorded approximately $4
million of asset write-downs related to future operating lease obligations on
idle or unprofitable bingo centers, corporate office relocation, and other
unusual charges to reduce non-performing assets to their net realizable values.
<TABLE>
<CAPTION>
Asset write-offs recorded in 1998 in accordance with SFAS 121 consist
of the following:
<S> <C>
Leasehold improvements $ 660,000
Goodwill 436,000
Future operating lease obligations 555,000
Discontinued "8-Liner" gaming machines 204,000
----------
Total asset write-offs 1,855,000
----------
Other significant unusual charges recorded in 1998 include the following:
Uncollectible bingo advances, deposits and receivables 1,054,000
Allowance for doubtful bingo accounts receivable 110,000
Uncollectible gaming advances, deposits and receivables 87,000
Expense recognition for company stock warrants issued in
February 1998 for consulting and investment banking services 221,000
Previously capitalized legal, financial relations costs,
and realized, unrecognized investment losses 340,000
Travel, recruiting and personnel costs due to relocations 370,000
----------
Total unusual charges 2,182,000
----------
Total unusual charges $4,037,000
==========
</TABLE>
The asset write-offs increased general and administrative expenses by $204,000.
The unusual charges increased general and administrative expenses by $931,000.
NOTE 7 - EXTRAORDINARY ITEM.
In November 1997, the Company and a former bingo and gaming center manager in
South Carolina mutually agreed to amend their stock purchase agreement. Under
this agreement, the Company's note payable to this manager was reduced from
$657,000 to $100,000, and $45,000 of past due payments were forgiven, creating a
one-time extraordinary gain of $602,000, ($398,000 net of taxes) in 1997. In
exchange, the Company agreed to reduce the lockup on the manager's 300,000
shares of Company stock from two years to one year. The Company retained all
other assets acquired in this acquisition.
F-15
<PAGE>
AMERICAN BINGO & GAMING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - NOTES PAYABLE.
Notes payable at December 31, 1998 consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Installment note payable to a third party, due in monthly installments of $17,728,
including interest at 6%, maturing June 1999 $ 104,533
Installment note payable to a financial institution, due in monthly installments of
15,615, including interest at 7.75%, maturing December 1999, secured by certain
equipment 175,874
Installment note payable to a third party, due in monthly installments of $13,570,
including interest at 13.6%, maturing January 2001, secured by certain equipment 334,165
Installment note payable to a third party, due in monthly installments of $5,009,
including interest at 13.5%, maturing January 2001, secured by certain equipment 104,842
Installment note payable to a third party, due in monthly installments of $1,525,
including interest at 13.3%, maturing March 2001, secured by certain equipment 35,234
Installment note payable to a third party, due in monthly installments of $2,240,
including interest at 13.9%, maturing April 2001, secured by certain equipment 53,340
Installment note payable to a third party, due in monthly installments of $4,220,
including interest at 12.7%, maturing June 2001, secured by certain equipment 107,919
Installment note payable to a third party, due in monthly installments of $10,162,
including interest at 13.1%, maturing December 2001, secured by certain equipment 295,803
Installment note payable to a third party, due in monthly installments of $7,069,
including interest at 12.5%, maturing January 2002, secured by certain equipment 208,345
Installment note payable to a related party, due in monthly installments of $9,765,
including interest at 8%, maturing May 2002 338,949
Installment note payable to an individual, due on demand, non-interest bearing,
unsecured 30,000
-----------
1,789,004
Less current installments (846,211)
-----------
Notes payable, net of current portion $ 942,793
===========
</TABLE>
Principle payments on notes payable for each of the next five fiscal years and
thereafter are as follows:
<TABLE>
<CAPTION>
<S> <C>
Years Ending December 31,
- -------------------------
1999 $ 846,211
2000 553,101
2001 356,424
2002 33,268
Thereafter ---
----------
$1,789,004
==========
</TABLE>
F-16
<PAGE>
======
AMERICAN BINGO & GAMING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - OBLIGATIONS UNDER CAPITAL LEASES.
In 1997, the Company entered into obligations under capital leases totaling
$1,235,812. The capital lease obligations are due in monthly and quarterly
installments ranging from $991 to $57,450, including interest at 11.67% to
14.3%, and final maturity of June 2000.
Future minimum payments due under capital lease obligations are as follows:
<TABLE>
<CAPTION>
<S> <C>
Years Ending December 31,
- -------------------------
1999 $ 456,079
2000 169,537
----------
Total future minimum lease payments 625,616
Less amount representing interest (66,320)
----------
Present value of minimum lease payments 559,296
Less current installments (411,891)
----------
Obligations under capital leases, net of current portion $ 147,405
==========
</TABLE>
NOTE 10 - FAIR VALUE OF FINANCIAL INSTRUMENTS.
SFAS No. 107, "Disclosure About Fair Value of Financial Instruments", requires
disclosure about the fair value of all financial assets and liabilities for
which it is practical to estimate. Cash, accounts receivable, accounts payable,
accrued liabilities and other liabilities are carried at amounts that reasonably
approximate their fair values.
The carrying amount and fair value of notes receivable and notes payable at
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Carrying Amount Fair Value
---------------- -----------
<S> <C> <C>
Notes receivable $ 1,340,891 $ 1,362,935
Capital leases payable 559,296 559,296
Notes payable 1,789,004 1,767,653
</TABLE>
The fair values of the Company's fixed rate notes receivable and notes payable
have been estimated based upon relative changes in the Company's borrowing rates
since origination of the fixed rate debt.
F-17
<PAGE>
AMERICAN BINGO & GAMING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - INCOME TAXES.
A reconciliation of the expected federal income tax (benefit) based on the U.S.
Corporate income tax rate of 34% to actual for 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
---------- ----------
Expected income tax (benefit) $(884,075) $ 506,105
Amounts not deductible for federal income tax purposes 53,730 11,631
State income taxes, net of federal income tax 163,806 63,036
Exercise of stock options --- (204,000)
Effective tax on unincorporated business acquired --- (207,860)
Additional income taxes related to DMC (acquisition
accounted for as a pooling) 99,336 ---
Effect of change in 1997 net operating loss 207,374 ---
Change in valuation allowance 622,973 34,776
---------- ----------
$ 263,144 $ 203,688
========== ==========
The provision for income taxes consists of the following:
1998 1997
---------- ----------
Current year income taxes:
Federal $ 99,336 $ 140,652
State 163,808 63,036
Deferred income taxes:
Federal --- ---
State --- ---
---------- ----------
$ 263,144 $ 203,688
========== ==========
</TABLE>
Deferred tax assets and liabilities as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Current deferred tax asset $ 110,900
Current deferred tax liability ---
Valuation allowance for current deferred tax asset $ (110,900)
------------
Net current deferred tax asset ---
============
Non-current deferred tax asset $ 1,377,063
Non-current deferred tax liability (30,103)
Valuation allowance for non-current deferred tax asset (1,346,960)
------------
Net non-current deferred tax asset $ ---
============
</TABLE>
The current deferred tax asset results primarily from differences in contingency
and valuation reserves for financial and federal income tax reporting purposes.
The non-current deferred tax asset results from differences in amortization of
goodwill and the non-compete agreements, and asset write-off and reserves for
financial and federal income tax reporting purposes and the deferred tax benefit
of net operating losses. The non-current deferred tax liability results from
differences in depreciation of fixed assets for financial reporting purposes and
federal income tax purposes. The net deferred tax asset has a 100% valuation
allowance due to the uncertainty of generating future taxable income.
F-18
<PAGE>
AMERICAN BINGO & GAMING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - INCOME TAXES (CONTINUED).
At December 31, 1998, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $2.1 million that begin expiring in
the year 2009. The utilization of the net operating loss is subject to
limitations in accordance with 382 of the Internal Revenue Code.
During 1997, the Company deducted, for income tax purposes, approximately
$600,000 related to employee stock options exercised which were not deductible
for financial reporting purposes. The related tax benefit of this permanent tax
difference, approximately $204,000, has been recorded as additional paid-in
capital. However, a valuation allowance has been established for the benefit
due to the uncertainty of generating future taxable income, which is included in
the above valuation allowance for non-current deferred tax assets. In the event
that the Company generates future taxable income, the related allowance will be
reduced and the full benefit will be recognized as an increase to equity.
NOTE 12 - SHAREHOLDERS' EQUITY.
During 1998 the Company issued 498,599 shares of its common stock and paid
$1,062,703 in cash and $1,983 derived from converted preferred dividends in
connection with the redemption of all outstanding preferred shares to common
stock. These common shares were issued at the $4.00 per share floor price or at
the existing fair market value above the floor price accumulated deficit. The
Company recorded a reduction of $1,063,182 to additional paid-in capital related
to these conversions and redemptions. Preferred stock dividends of $95,874 were
paid during 1998 and recorded against accumulated deficit for preferred share
dividends due prior to the redemption dates.
During 1998 the Company repurchased and cancelled 76,475 warrants for $38,237
and incurred additional warrant exercise costs of $10,321 related to the 1997
warrant call.
On October 30, 1998, the Company issued 128,000 shares of treasury stock related
to the acquisition of the six bingo centers in Texas. These shares were valued
at the existing fair market value of $1.56 per share, totaling $200,000. The
net effect of the issuance of treasury stock was recorded as a $388,896
reduction of treasury stock and a $188,896 reduction to additional paid-in
capital. All of the shares issued are subject to Company re-sale lockup
agreements of one to three years.
The Company issued 2,381 shares of its common stock in July 1998 pursuant to
purchases under the Company's Employee Stock Purchase Plan. These shares were
issued at $2.55 per share, pursuant to the Plan purchase price for the six-month
plan period of January 1 through June 30, 1998. The Company recognized $6,071
in equity proceeds through voluntary payroll deductions pursuant to these plan
purchases.
The Company's Board of Directors authorized the Company to purchase up to 1.0
million shares of its common stock in open market or privately-negotiated
transactions over an unlimited period of time, beginning in the second quarter
of 1998. The Company repurchased 359,300 of its common shares for $1,075,295
through its stock buyback program during the second and third quarters of 1998.
The price per share to repurchase these shares ranged from $2.12 to $3.75. At
December 31, 1998, the Company holds 231,300 treasury shares with a cost of
$686,399 which equates to an average price per share of approximately $2.97.
F-19
<PAGE>
AMERICAN BINGO & GAMING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - SHAREHOLDERS' EQUITY (CONTINUED).
On March 25, 1998, the Company issued 29,630 shares of common stock as partial
consideration related to the acquisition of Ambler Bingo. These shares were
valued at the existing fair market value of $3.04 per share, totaling $90,000.
During the first quarter of 1998 the Company issued 33,733 shares of its common
stock pursuant to employee stock option exercises. These option shares were
exercised and issued at $1.17 per share and resulted in an increase to
additional paid-in capital of $38,968.
In February 1998, the Company entered into a one year agreement for financial
consulting and investment banking services in exchange for warrants to purchase
100,000 shares of the Company's common stock at an exercise price of $3.88 per
share. The warrants vest and become fully exercisable on February 6, 1999 and
expire on February 4, 2004. The Company recorded expense of $221,616 during
1998 related to these warrants. This amount represents managements estimate of
the fair value of these warrants at the date of grant using a Black-Scholes
pricing model with the following assumptions: applicable risk-free interest rate
based on the current treasury-bill interest rate at the grant date of 6%;
dividend yields of 0%; volatility factors of the expected market price of the
Company's common stock of 84%; and an expected life of the warrant of 3 years.
In December 1997, the Company redeemed 2,293,995 of its Redeemable Common Stock
Purchase Warrants pursuant to the Company's warrant call in November of 1997.
Each warrant was converted into one share of Company common stock at the price
of $5.00 per share. The Company grossed $11.5 million from this transaction,
and netted $11.1 million after associated financing costs.
The Company issued 2,495,649 shares of its common stock in 1997 for various
acquisitions in South Carolina. In December, the Company issued 1,000,000
shares in the stock-for-stock acquisition of the Darlington Music Company video
gaming route business. In October, the Company issued 358,000 shares in the
stock-for-stock acquisition of the Lucky 4 video gaming business. In September,
the Company issued 827,680 shares in the stock-for-stock acquisition of Gold
Strike video gaming business, and issued 9,969 shares in the acquisition of two
bingo centers. Early in the first quarter of 1997, the Company issued 300,000
shares in a stock purchase acquisition of a bingo center, equipment and various
corporations. All of the shares issued for these acquisitions, excluding the
9,969 tranche, were subject to Company re-sale lockup agreements of one to three
years.
The Company granted 50,000 shares of its common stock in January of 1997 to
employees as an annual bonus for 1997. These shares were valued at the existing
fair market value of $.94 per share.
The Company issued 2,000 preferred shares in August of 1997 at $1,000 per share
in a private equity transaction, grossing $2.0 million and netting $1.83 million
after associated financing costs. The net proceeds from this transaction were
recorded as equity. These shares are convertible into Company common shares
under a variable pricing formula ranging from $4.00 to $5.50 per share.
Conversion rights on these shares were fully vested at April 1, 1998. These
shares pay an annual dividend of 7% on a quarterly basis on the unconverted
principle balance. As of April 6, 1998, approximately 500 shares or 25% of the
total preferred shares had been converted into approximately 90,000 common
shares.
F-20
<PAGE>
AMERICAN BINGO & GAMING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - SHAREHOLDERS' EQUITY (CONTINUED).
The Company issued 200,000 shares of its common stock in 1997 pursuant to
employee stock option exercises from June through September. These option
shares were exercised and issued at various prices from $1.00 to $2.50 per
share, netting $347,000 in equity proceeds for the Company.
The Company issued 74,000 shares of its common stock in the first quarter of
1997 for various professional, lobbying, and legal services rendered. These
shares were valued at the existing fair market value of $1.09 per share.
The Company issued 10,767 shares of its common stock in July and December of
1997 pursuant to purchases under the Company's Employee Stock Purchase Plan.
These shares were issued at the existing fair market value of $1.17 and $3.53,
respectively, per share, for the six-month plan periods ended in June and
December, respectively, netting the Company over $20,000 in equity proceeds
through voluntary payroll deductions.
NOTE 13 - EARNINGS PER SHARE.
A reconciliation of basic to diluted earnings (loss) per share is as follows:
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------------
1998 1997
-------------------------- -----------------------
Basic Diluted Basic Diluted
<S> <C> <C> <C> <C>
Numerator:
- --------------------------------------
Net income (loss) $(2,600,222) $(2,600,222) $1,284,856 $1,284,856
less preferred dividends (97,857) (97,857) (58,333) ---
------------ ------------ ----------- ----------
Income (loss) available to
common stockholders $(2,698,079) $(2,698,079) $1,226,523 $1,284,856
============ ============ =========== ==========
Denominator:
- --------------------------------------
Weighted average shares outstanding 9,299,908 9,299,908 7,160,612 7,160,612
Effect of dilutive securities:
Preferred stock --- --- --- 220,620
Stock options and warrants --- --- --- 752,554
------------ ------------ ----------- ----------
Weighted average shares outstanding 9,299,908 9,299,908 7,160,612 8,133,786
============ ============ =========== ==========
Earnings (loss) per share before
extraordinary item $ (.29) $ (.29) $ .17 $ .16
============ ============ =========== ==========
</TABLE>
F-21
<PAGE>
AMERICAN BINGO & GAMING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - ACCOUNTING FOR STOCK BASED COMPENSATION.
The Company applies APB Opinion No. 25 "Accounting for Stock Issued to
Employees" ("APB 25") in accounting for its stock options. At December 31,
1998, the Company has implemented four shareholder approved stock option plans.
These plans are intended to comply with Section 422 of the Internal Revenue Code
of 1986, as amended. The plans collectively provide for the total issuance of
2,000,000 common shares over ten years from the date of each plan's approval.
At December 31, 1998, a total of 1,175,600 options are outstanding under these
plans. An additional 141,525 options for shares are outstanding to
non-employees outside of these plans as of the end of 1998.
A summary of the Company's stock option plans is as follows:
<TABLE>
<CAPTION>
Employee Stock Plans Other Compensatory Combined Total
------------------ ---------------- ---------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price Options
---------- ------ -------- ------ ---------------
<S> <C> <C> <C> <C> <C>
Outstanding at 12/31/96 1,059,999 $ 1.59 --- $ --- 1,059,999
Granted 526,667 1.00 218,000 4.53 744,667
Exercised (200,000) 1.72 --- --- (200,000)
Forfeited --- --- --- --- ---
---------- ------ -------- ------ ---------------
Outstanding at 12/31/97 1,386,666 2.89 218,000 4.53 1,604,666
Granted 531,000 3.36 --- --- 531,000
Exercised (33,733) 1.18 --- --- (33,733)
Forfeited (708,333) 3.60 (76,475) 5.50 (784,808)
---------- ------ -------- ------ ---------------
Outstanding at 12/31/98 1,175,600 $ 2.43 141,525 $ 4.00 1,317,125
========== ====== ======== ====== ===============
</TABLE>
The fair value of options issued during 1998 and 1997 was $1,305,753 and
$711,591, respectively.
The following table summarizes information about options outstanding at December
31, 1998 and 1997 under the Employee Stock Plan:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------- ----------------------------
Weighted Avg.
Range of Number Remaining Weighted Avg. Number Weighted Avg.
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
---------------- ----------- ---------------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
1998: $ 0.96 - $6.16 1,175,600 4.7 years $ 2.43 710,422 $ 2.19
1997: $ 0.96 - $6.25 1,386,666 3.9 years $ 2.89 430,001 $ 1.53
</TABLE>
F-22
<PAGE>
AMERICAN BINGO & GAMING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - ACCOUNTING FOR STOCK BASED COMPENSATION (CONTINUED).
The following table summarizes information about other compensatory stock
options outstanding at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------- ----------------------------
Weighted Avg.
Range of Number Remaining Weighted Avg. Number Weighted Avg.
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
---------------- ----------- ---------------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
1998: $ 3.00 - $5.50 141,525 3.4 years $ 4.00 141,585 $ 3.99
1997: $ 3.00 - $5.50 218,000 3.2 years $ 4.53 85,000 $ 3.00
</TABLE>
The options granted in 1998 and 1997 have exercise prices which approximate fair
value and accordingly, no compensation cost has been recognized for the
compensatory stock options in the consolidated financial statements. Had
compensation cost for the Company's stock options been determined consistent
with FASB statement No. 123, "Accounting for Stock Based Compensation", the
Company's net income (loss) and net income (loss) per share would have been
decreased (increased) to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------
1998 1997
----------- ------------
<S> <C> <C> <C>
Net income (loss) As reported $(2,600,222) $1,682,392
Pro forma $(2,900,623) $1,069,196
Basic earnings per share As reported $ (.29) $ .23
Pro forma $ (.32) $ .15
Diluted earnings per share As reported $ (.29) $ .21
Pro forma $ (.32) $ .13
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model. The following assumptions were used for
grants in 1998; dividend yield of 0%, expected volatility of 84%, risk free
interest rates estimated at 6.0%, and an expected life of 3 years. The
following assumptions were used for grants in 1997; dividend yield at 0%,
expected volatility at 76%, risk free interest rates estimated at 6.0%, and an
expected life of 1-3 years.
F-23
<PAGE>
AMERICAN BINGO & GAMING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - RELATED PARTY TRANSACTIONS.
At December 31, 1998, notes receivable included promissory notes receivable from
related parties totaling $460,000. The interest rates range from 7.0% - 8.0%
with maturity dates ranging from December 15, 1998 to May 31, 2001. Interest
income related to these notes recorded by the Company was $34,000 for the year
ended December 31, 1998.
In March 1998 the Company acquired Ambler Bingo. In conjunction with this
purchase, the Company issued a promissory note payable in the amount of $400,000
to the seller (a related party), as partial consideration for this purchase, and
entered into a three-year employment agreement with the seller. This note
payable is due in monthly installments of $9,765, with an interest rate of 8.0%
and a maturity date of May 2002. For the year ended December 31, 1998, the
Company recognized $23,200 of interest expense to this obligation.
In December 1997, as a part of the Company's acquisition of Darlington Music
Co., Inc, the Company assumed a related party lease for an office and game
machine warehouse facility. The lease is by and between the Company and a
Company Director and Officer, and two immediate family members of the related
party. The lease originated on January 15, 1990 for a 15 year term with monthly
rental payments of $3,500. For the years ended December 31, 1998 and 1997, the
Company has expensed $42,000 for rental payments to the related parties under
this lease.
As a part of the Company's acquisition of Gold Strike, Inc. and Lucky 4, Inc.
the Company assumed an operating lease for gaming properties located in South
Carolina. The lessor is a partnership in which a Director of the Company is a
50% general partner. This lease expires November 2001, with renewal options. The
monthly rental payments under this lease are $5,270. For the years ended
December 31, 1998 and 1997, the Company has expensed $63,240 and $34,930
respectively for rental payments to the related party under this lease.
On November 9, 1998, the Company reorganized its South Carolina video gaming
operations by entering into a three year Agreement with an operator, effectively
outsourcing the operations of the Company's non-route video gaming operations at
eight video gaming machine centers. The operator is owned and managed by a
shareholder and former officer, Director and employee of the Company, and a
second shareholder and former employee of the Company. In addition, at seven of
the eight centers, the Company has entered into a lease or a sublease with the
operator which provides for the monthly payment of rent by the operator. Under
the Agreement, the Company retains ownership of the underlying video gaming
machines and all related assets. In connection with the execution of the
Agreement, the Company loaned $80,000 to the operator, due in full, with
interest accruing at prime-plus 2%, due upon maturity in May 1999.
F-24
<PAGE>
AMERICAN BINGO & GAMING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - COMMITMENTS AND CONTINGENCIES.
(a) Operating Leases:
The Company is obligated under various operating leases. Generally, the leases
provide for minimum annual rentals as well as a proportionate share of the real
estate taxes and certain common area charges. Minimum annual rentals under
these leases are as follows:
<TABLE>
<CAPTION>
Years Ending Minimum
December 31, Rentals
- ------------ ----------
<S> <C>
1999 $2,073,802
2000 1,815,831
2001 1,319,310
2002 710,413
2003 and thereafter 2,012,951
----------
Total minimum annual rentals $7,932,307
==========
</TABLE>
Rent expense for the years ended December 31, 1998 and 1997 amounted to $2.6
million and $1.5 million, respectively.
(b) Legal:
In July of 1995 the Company bought three Florida bingo centers from Phillip
Furtney and two corporations related to Mr. Furtney (which corporations and Mr.
Furtney are referred to collectively for purposes of this discussion as
"Furtney"). On June 12, 1997, Furtney filed a lawsuit against the Company in
the Circuit Court in Florida, alleging breach of contract on these purchases.
Furtney alleged that the Company defaulted on its original purchase note and
stock obligations under the purchase agreements. Furtney seeks to recover
damages in the amount of $900,000 related to these allegations. On July 12,
1997, the Company answered this lawsuit and filed a counterclaim against Furtney
alleging, among other things, fraud, negligent misrepresentation, breach of
express warranties, contractual indemnity and tortious interference with
contractual rights. The Company believes that it was materially defrauded in
its purchase of these three Florida bingo centers from Furtney in that; Furtney
made no disclosure to the Company of an ongoing criminal investigation of the
operation of these bingo centers by the Florida State Attorney General's Office,
and that Furtney was fully aware of this investigation. The state of Florida
temporarily closed these three bingo centers, as well as several other centers
formerly owned by Mr. Furtney, in November 1995. The Company re-sold these three
bingo centers in December of 1995. In January 1997, the Company and the State
of Florida settled all matters regarding the Company's previous ownership and
operation of these bingo centers. The Company believes that Furtney's lawsuit
against the Company is completely without merit and that the Company will
prevail in its counterclaim against him. There can be no assurance of this
result, however, and a decision against the Company could have a material
adverse effect on the financial position and operations of the Company.
F-25
<PAGE>
AMERICAN BINGO & GAMING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - COMMITMENTS AND CONTINGENCIES (CONTINUED).
In 1997, one of the Company's subsidiaries was named a defendant (among many
other video gaming operators) in a legal action in the Federal U.S. District
Court in Columbia, South Carolina filed by video poker players. This action
alleges various wrongful acts by the defendants, including allegations that
certain of the defendants' video gaming operations in South Carolina: i)
comprise a lottery, which violates the state constitution; ii) violate the
state's daily net video gaming machine payout limit of $125 per player; iii)
violate the state's single premise rule which only allows up to five video
gaming machines per premise; and iv) violate the state's prohibition against
beer and wine permit holders allowing gambling or games of chance. The
plaintiffs in this action are attempting to have this action certified as a
class action lawsuit. The plaintiffs seek to recover the money lost from playing
video poker and to restrict or otherwise limit in various respects the manner in
which video gaming operations are conducted in South Carolina. The District
Judge certified questions for an advisory opinion of the South Carolina Supreme
Court regarding whether video gaming constitutes an illegal lottery in South
Carolina. The Supreme Court issued an opinion in November 1998 stating that
video gaming does not constitute an illegal lottery. Other issues in this case
are still pending in the District Court. The Company believes that this action
is completely without merit and will defend itself vigorously. If this case
were to be decided against the Company, it would likely have a material adverse
effect on the financial position and operations of the Company.
In 1997, the South Carolina Department of Revenue and the South Carolina Law
Enforcement Division brought a declaratory judgment action against various
organizations whose members have beer and wine permits and also offer video
poker for play. The suit was also brought against certain businesses in the
video poker industry. Neither the Company nor any subsidiary is a named
defendant in this case. The plaintiffs have styled the case as a class action
and have requested that the court declare that the South Carolina Code prohibits
beer and wine from being sold at establishments that provide video poker
machines for play. At issue in the case is whether a specific South Carolina
statute (S.C. Code Section 61-4-580(3)) prohibits a beer and wine permit holder
from also offering video poker for play. The plaintiffs have filed a motion
that the case be certified as a class action and have filed a motion for summary
judgment. The defendants are vigorously defending the case. If this case were
to be decided in favor of the Department of Revenue, it would likely have a
material adverse effect on the financial position and operations of the Company.
Additionally, on June 30, 1998, the South Carolina Department of Revenue
announced that as of August 1, 1998, it would no longer allow beer and wine
permits at any location that also offers video poker, based on its
interpretation of the South Carolina statute noted above. However, in two
separate state court cases, two state Circuit Court judges have entered
injunctions prohibiting the Department of Revenue from enforcing its
interpretation of the South Carolina statute at issue at the current time. At
the current time, the Department of Revenue is issuing beer and wine permits for
locations which also offer video poker. If this issue were to be decided in
favor of the Department of Revenue, it would likely have a material adverse
effect on the financial position and operations of the Company.
On September 9, 1998, the Company filed a lawsuit in the Court of Common Pleas
for the Fifth Judicial Circuit in Columbia, South Carolina, against two former
directors, Greg Wilson and Robert Hersch, Investors Associates, Inc., who
previously served as the Company's underwriter, and two former employees, Roy
Stevens and Paul Hermelink. On February 26, 1999, the Company and Greg Wilson
entered into a settlement with respect to this lawsuit and other issues and thus
Greg Wilson has since been dismissed with prejudice from this lawsuit. The
lawsuit seeks to recover both actual and punitive damages, as well as the return
of profits wrongfully obtained and the return of assets, including common stock
of the Company, wrongfully acquired, pursuant to various causes of action. On
September 30, 1998, Greg Wilson and various family members filed suit against
the Company in the Court of Chancery for the State of Delaware, which lawsuit
was also dismissed with prejudice in connection with the settlement with Greg
Wilson and various family members discussed above.
F-26
<PAGE>
AMERICAN BINGO & GAMING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - COMMITMENTS AND CONTINGENCIES (CONTINUED).
- ----------------------------------------------------------
On December 17, 1998, Roy Stevens, a former employee and current shareholder of
the Company, filed a lawsuit against the Company, certain of its subsidiaries,
and certain officers, directors and employees of the Company in the Court of
Common Pleas for the Eleventh Judicial Circuit in Lexington, South Carolina.
The lawsuit alleges that the defendants breached fiduciary duties, breached
contracts, maliciously prosecuted the plaintiff, and engaged in various
fraudulent and illegal acts. The plaintiff seeks to recover actual and punitive
damages of an unspecified amount, seeks the reassignment of a lease agreement
which secures a promissory note issued by the Company to the plaintiff, and
seeks to have a receiver appointed to take control of the Company during the
pendency of this lawsuit. The Company believes that this lawsuit is completely
without merit and will defend itself vigorously. This lawsuit is in the early
stages and discovery has not yet commenced. If this case were to be decided
against the Company it would likely have a material adverse effect on the
financial position and operations of the Company.
The South Carolina legislature and the Governor of South Carolina are currently
considering proposing legislation that could significantly overhaul the
regulatory framework for video poker in South Carolina and impose significantly
higher taxes. Although it is anticipated that some legislation will be proposed
in 1999, the actual legislation has not yet been presented in the legislature
and thus the nature and impact of such legislation is not known at the current
time. However, any such legislation, if adopted, could have a material adverse
effect on the financial position and operations of the Company.
In the normal course of its business, the Company is subject to litigation.
Management of the Company, based on discussions with its outside legal counsel,
does not believe any claims, individually or in the aggregate, will have a
material adverse effect on the Company's financial position or operations of the
Company, except as otherwise stated above.
NOTE 17 - YEAR 2000.
The Company has conducted a comprehensive review of its computer systems to
identify potential problems that could be caused by the Year 2000 issue. This
issue is the result of computer programs that were written using two digits
rather than four to define the applicable year. Such programs may recognize a
date using "00" as the year 1900 rather than the year 2000, which could result
in a system failure or miscalculation. Management currently believes that the
Year 2000 issue will not pose significant operational problems for the Company's
computer systems or result in significant costs to become Year 2000 compliant.
However, if the Company's computer systems were subject to undetected system
failures or operational problems resultant from the Year 2000 issue, there can
be no assurance that any one or more such failures would not have a material
adverse effect on the Company. The Company is currently in the process of
certifying that the vendors and suppliers of its critical components and
services are Year 2000 compliant and the Company expects certification to be
completed by April 1999. The Company intends to rely on Year 2000 compliance on
the part of public utility providers and all state and local regulatory
agencies, although non-compliance by those entities could materially adversely
affect the Company's financial condition and operations.
F-27
<PAGE>
AMERICAN BINGO & GAMING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - SEGMENTS.
The Company adopted Statement of Financial Accounting Standards No.
131,"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131") in the fiscal year ended December 31, 1998. SFAS 131 establishes
standards for reporting information regarding operating segments in annual
financial statements and requires selected information for those segments to be
presented in interim financial reports issued to stockholders. SFAS 131 also
establishes standards for related disclosures about products and services and
geographic areas. Operating segments are identified as components of an
enterprise about which separate discrete financial information is available for
evaluation by the chief operating decision maker, or decision making group, in
making decisions how to allocate resources and assess performance.
The Company's Chief Operating Decision Maker ("CODM"), the Chairman and CEO,
evaluates performance and allocates resources based on a measure of segment
profit or loss from operations. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies except that depreciation and amortization are allocated to
each segment from functional department totals based on certain assumptions
which include, among other things, revenues. Also, the Company's CODM does not
view segment results below operating profit (loss), therefore, net interest
income, other income, and the provision for income taxes are not broken out by
segment below.
The Company's video gaming segment represents operations of the Company's video
gaming machines in South Carolina. The bingo segment encompasses bingo center
services provided to charitable organizations. These segments were identified
based on the different nature of the services and legislative monitoring and, in
general, the type of customers for those services.
A summary of the segment financial information reported to the CODM is as
follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1998
---------------------------------------------------------
Video Gaming Bingo Adjustment Consolidated
------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Revenue $ 9,738,085 $ 4,855,532 $ 851,839 $ 15,445,456
Depreciation and Amortization 986,818 1,041,236 59,423 2,087,477
Segment profit (loss) 1,643,301 (1,203,841) (3,039,682) (2,600,222)
Segment Assets 7,380,853 10,754,901 846,818 18,982,572
Capital expenditures by segment 1,883,194 605,752 50,684 2,539,630
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1997
------------------------------------------------------
Video Gaming Bingo Adjustment Consolidated
------------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
Revenue $ 8,874,257 $2,921,386 $ 427,492 $ 12,223,135
Depreciation and Amortization 345,102 758,850 - 1,103,952
Segment profit (loss) 1,299,664 1,500,639 (1,117,911) 1,682,392
Capital expenditures by segment 1,551,025 942,095 107,531 2,600,651
</TABLE>
The adjustments represent video gaming and bingo concession and other income,
depreciation and amortization related to corporate assets, corporate losses,
corporate assets and corporate capital expenditures to reconcile segment
balances to consolidated balances. None of the other adjustments are
significant.
F-28
<PAGE>
AMERICAN BINGO & GAMING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - SUBSEQUENT EVENTS.
On February 26, 1999 the Company entered into a settlement agreement, compromise
of claims and mutual release with the Company's former president and chief
executive officer and members of his family. Under the terms of the agreement
the Company will receive the net proceeds from the sale of 200,000 shares of the
Company's common stock owned by the former president and $1,300 as consideration
for the founder's stock originally issued to the former president. Also, the
former president and family members will sell 1.1 million shares of the
Company's common stock over a five year period beginning June 1, 1999 at a
predetermined liquidation rate, such proceeds to be received by the Company.
F-29
<PAGE>
<TABLE>
<CAPTION>
AMERICAN BINGO & GAMING CORP. AND SUBSIDIARIES
SCHEDULE II - VALUATION and QUALIFYING ACCOUNTS
For the Years Ended December 31, 1998 and 1997
Charged Charged
Balance to costs & to other Balance
January 1, Expenses Accounts Deductions December 31,
----------- -------- ----------- ----------- -------------
1998
- -------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for notes receivable $ 231,395 --- 35,800(1) --- $ 195,595
Allowance for doubtful accounts $ --- 109,595 --- --- $ 109,595
1997
- -------------------------------
Allowance for notes receivable $ 290,773 --- 59,378(1) --- $ 231,395
Allowance for doubtful accounts $ --- --- --- --- $ ---
<FN>
(1) Allowance was reduced to reflect net realizable value.
</TABLE>
F-30
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
Exhibit Sequential
Number Description Page Number
- ------- ----------------------------------------------------------------------- -----------
<C> <S> <C>
3.1 Certificate of Incorporation of the Company dated September 8, 1994,
as amended October 17, 1994, and further amended July 31, 1997 and
August 13, 1998.
3.2 Amended and Restated Bylaws of the Company (incorporated by reference
to Exhibit 3.2 of the Quarterly Report on Form 10-QSB filed by the
Company on August 14, 1998 for the quarter ended June 30, 1998).
4.1 Rights Agreement dated August 4, 1998, between the Company and
American Stock Transfer & Trust Company (incorporated by reference to
Exhibit 1 of the Registration Statement on Form 8-A filed by the
Company on August 13, 1998).
4.2 Form of Subscription Agreement used in connection with issuance of
Series A Convertible Preferred Stock to Plazacorp Investments Limited,
P.R.I.F. #4, David Heller and Sam Reisman on August 1, 1997.
10.1 Amended and Restated 1994 Stock Option Plan.
10.2 Amended and Restated 1995 Employee Stock Option Plan.
10.3 1995 Employee Stock Purchase Plan (incorporated by reference to
Exhibit 10.12 of the Annual Report on Form 10-KSB filed by the Company
for the year ended December 31, 1994).
10.4 Amended and Restated 1996 Employee Stock Option Plan.
10.5 Amended and Restated 1997 Stock Option Plan (incorporated by reference
to Exhibit 10.5 of the Quarterly Report on Form 10-QSB filed by the
Company on August 14, 1998 for the quarter ended June 30, 1998).
10.6 Agreement and Plan of Reorganization dated August 13, 1997, by and
among the Company, Gold Strike Acquisition Corporation, Gold Strike,
Inc. and Michael W. Mims (incorporated by reference to Exhibit 10.6.
of the Quarterly Report on Form 10-QSB filed by the Company on August
14, 1998 for the quarter ended June 30, 1998).
10.7 Agreement and Plan of Reorganization dated November 12, 1997, by and
among the Company, Darlington Music Acquisition Corporation,
Darlington Music Co., Inc. and George M. Harrison, Jr., Thomas M.
Harrison and William W. Harrison (incorporated by reference to Exhibit
10.7 of the Quarterly Report on Form 10-QSB filed by the Company on
August 14, 1998 for the quarter ended June 30, 1998).
10.8 Acquisition Agreement dated October 30, 1998 by and between the
Company and Gary Mike Ehler, for the acquisition of Strike It Rich
Bingo, Inc. (excluding the Exhibits thereto, which the Company shall
submit supplementally if requested by the SEC), which Acquisition
Agreement is the same form of contract used for the acquisition by the
Company from Gary Mike Ehler of The Samaritan Associates, Inc., Meeks
Management Company, Lavaca Enterprises, Incorporated, Lucky Bingo,
Inc., and Parkway Bingo, Inc. (incorporated by reference to Exhibit
2.1 of the Quarterly Report on Form 10-QSB filed by the Company on
November 12, 1998 for the quarter ended September 30, 1998). Attached
to the Acquisition Agreement is a schedule summarizing the significant
differences between this Acquisition Agreement and the Acquisition
Agreements used for the acquisition of the other five entities.
10.9 Employment Agreement dated December 18, 1997 with George M. Harrison,
Jr., as amended February 25, 1998 and as further amended July 27, 1998
(incorporated by reference to Exhibit 10.13 of the Quarterly Report on
Form 10-QSB filed by the Company on August 14, 1998 for the quarter
ended June 30, 1998).
10.10 Employment Agreement dated April 30, 1998 with Andr Marc Hilliou
(incorporated by reference to Exhibit 10.14 of the Quarterly Report on
Form 10-QSB filed by the Company on August 14, 1998 for the quarter
ended June 30, 1998).
10.11 Employment Agreement dated June 19, 1998 with Richard M. Kelley, as
amended October 23, 1998.
10.12 Employment Agreement dated September 28, 1998 with Marie T. Pierson
(incorporated by reference to Exhibit 10.3 of the Quarterly Report on
Form 10-QSB filed by the Company on November 12, 1998 for the quarter
ended September 30, 1998).
10.13 Employment Agreement dated November 2, 1998 with Nancy Pollick.
10.14 Consulting Agreement dated November 9, 1998 with Michael W. Mims.
10.15 Mutual Release and Settlement Agreement dated July 24, 1998 with L.
Gregory Wilson (incorporated by reference to Exhibit 99.2 of the
Current Report on Form 8-K filed by the Company on August 4, 1998).
10.16 Severance Agreement dated July 24, 1998 with L. Gregory Wilson
(incorporated by reference to Exhibit 99.3 of the Current Report on
Form 8-K filed by the Company on August 4, 1998).
10.17 Settlement Agreement, Compromise of Claims and Mutual Release dated
February 26, 1999, by and among Gregory Wilson, Sally Stewart Wilson,
Linda Bussey, the Linda Bussey Irrevocable Trust, Len Bussey, Barbara
Wilson and the Company (incorporated by reference to Exhibit 99.1 of
the Current Report on Form 8-K filed by the Company on March 4, 1999).
10.18 Promissory Note dated February 24, 1998, with George M. Harrison, Jr.
(incorporated by reference to Exhibit 10.20 of the Quarterly Report on
Form 10-QSB filed by the Company on August 14, 1998 for the quarter
ended June 30, 1998).
10.19 Promissory Note and Security Agreement dated June 4, 1998 with
Michael W. Mims (incorporated by reference to Exhibit 10.19 of the
Quarterly Report on Form 10-QSB filed by the Company on August 14,
1998 for the quarter ended June 30, 1998).
10.20 Master Coin Machine Agreement dated November 9, 1998, by and among
the Company, Gold Strike, Inc., Mims & Dye Enterprises, LLC, Michael
W. Mims and Danny C. Dye.
10.21 Promissory Note dated November 9, 1998, between Gold Strike, Inc. and
Mims & Dye Enterprises, LLC.
10.22 Guaranty Agreement dated November 9, 1998 with Michael W. Mims and
Danny C. Dye.
10.23 Promissory Note dated February 18, 1999 between the Company and Mims
& Dye Enterprises, LLC.
10.24 Settlement Agreement dated January 27, 1997 with the State of Florida
(incorporated by reference to Exhibit 10.21 of the Quarterly Report on
Form 10-QSB filed by the Company on August 14, 1998 for the quarter
ended June 30, 1998).
10.25 Form of Stock Purchase Warrant used in connection with warrant grant
to Gaines Berland, Inc., Peter Blum, Steven Blumberg and Lisa Evanchuk
on February 6, 1998.
10.26 Form of Common Stock Purchase Warrant used in connection with
issuance of Series A Convertible Preferred Stock to Plazacorp
Investments Limited, P.R.I.F. #4, David Heller and Sam Reisman on
August 1, 1997.
10.27 Form of Registration Rights Agreement used in connection with
issuance of Series A Convertible Preferred Stock to Plazacorp
Investments Limited, P.R.I.F. #4, David Heller and Sam Reisman on
August 1, 1997.
11.1 Computation of Earnings Per Share.
21.1 Subsidiaries of the Company.
27.1 Financial Data Schedule (for SEC use only).
</TABLE>
<PAGE>
CERTIFICATE OF INCORPORATION OF
AMERICAN BINGO & GAMING CORP.
A STOCK CORPORATION
1. The name of this Corporation is: AMERICAN BINGO & GAMING CORP.
2. Its Registered office in the State of Delaware is to be located at 15
EAST NORTH STREET in the CITY OF DOVER, COUNTY OF KENT, 19901. The Registered
Agent in charge thereof is INCORPORATING SERVICES, LTD.
3. The purpose of the corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of
Delaware.
4. The amount of the total authorized capital stock of this corporation is
TWENTY MILLION (20,000,000) COMMON SHARES WITH PAR VALUE OF .001.
5. The name and mailing address of the incorporator are:
JAMES GERACI
C/O INTERCOUNTY CLEARANCE CORPORATION
194 WASHINGTON AVE.
ALBANY, NY 12210
I, THE UNDERSIGNED, for the purpose of forming a corporation under the laws of
the State of Delaware, do make, file and record this Certificate, and do certify
that the facts herein stated are true, and I have accordingly hereunto set my
hand this 8th day of September, A.D. 1994.
/s/ James Geraci
------------------
James Geraci
Incorporator
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
AMERICAN BINGO & GAMING CORP.
American Bingo & Gaming Corp., a Delaware corporation (the "Corporation"),
hereby certifies as follows:
FIRST: That the Board of Directors of the Corporation, by unanimous written
consent dated October, 1994 in lieu of a meeting of such Board, adopted a
resolution proposing and declaring advisable the following amendments to the
Certificate of Incorporation of the Corporation, and declaring that such
proposed amendments be submitted for consideration by the stockholders of the
Corporation entitled to vote in respect thereof. The resolution setting forth
the proposed amendments is as follows:
RESOLVED, that the Certificate of Incorporation of this Corporation be amended
as follows:
II. Paragraph 4 of the Certificate of Incorporation relating to the
capitalization of the Corporation, is hereby deleted and amended to read in its
entirety as follows:
"4.a. Authorized Shares. The total number of shares of stock which the
------------------
Corporation shall have authority to issue is twenty-one million (21,000,000),
which shall consist of 20,000,000 shares, $.001 par value, designated as Common
Stock and one million (1,000,000) shares, $.01 par value, designated as
Preferred Stock.
4.b. Preferred Stock. Shares of the Preferred Stock may be issued from time
----------------
to time in series or otherwise and the Board of Directors of the Corporation is
hereby authorized, subject to the limitations provided by law, to establish and
designate series, if any, of the Preferred Stock, to fix the number of shares
constituting any such series, and to fix the voting powers, designations, and
relative, participating, option rights, conversion, redemption and other rights
of the shares of Preferred Stock or series thereof, and the qualifications,
limitations and restrictions thereof, and to increase and to decrease the number
of shares of Preferred Stock or shares constituting any such series. The
authority of the Board of Directors of the Corporation with respect to shares of
Preferred Stock or any series thereof shall include but shall not be limited to
the authority to determine the following-:
(i) the number of shares constituting any such series, and the
distinctive designations thereof;
(ii) the terms and conditions of the voting rights of the Preferred
Stock or any series thereof, including but not limited to, the right of the
holders of such shares to vote as a separate class either alone or with the
holders of shares of one or more other class or series of Preferred Stock and
the right to have more than one vote per share;
<PAGE>
(iii) the increase, and the decrease to a number not less than the
number of the outstanding shares of the Preferred Stock of any series thereof,
of the number of shares constituting such series theretofore fixed.
(iv) the rate or rates and times at which dividends on the shares of
Preferred Stock or any series thereof shall be paid and, whether such dividends
shall be cumulative and, if cumulative, the date or dates from and after which
they shall accumulate;
(v) the redemption price or prices, if any, and the terms and
conditions on which shares of the Preferred Stock or any series thereof shall be
redeemable including but not limited to the date or dates upon or after which
such shares shall be redeemable and the amount per share which shall be payable
upon such redemption which amount may vary under different circumstances and at
different redemption dates;
(vi) the requirement of any sinking funds to be applied to the purchase
or redemption of shares of the Preferred Stock or series thereof, and if so, the
amount of such fund or funds and the manner of application;
(vii) the rights of shares of the Preferred Stock or any series thereof
in the event of liquidation, dissolution or winding up of, or upon any
distribution of the assets of, the Corporation;
(viii) the rights, if any, of the holders of shares of the Preferred
Stock or any series thereof, to convert such shares into, or to exchange such
shares for, shares of any other class, classes or series of stock and the price
or prices or the rates of exchange and the adjustments at which such shares
shall be convertible or exchangeable, and any other terms and conditions of such
conversion or exchange; and
(ix) any other preferences and relative, participating, optional or
other special rights of shares of the Preferred Stock or any series thereof and
qualifications, limitations or restrictions of rights or powers to which shares
of any future series shall be subject.
4.c. Common Stock.
(i) Dividends. Subject to the preferential dividend rights applicable
---------
to shares of Preferred Stock, the holders of shares of Common Stock shall be
entitled to receive such dividends as may be declared by the Board of Directors,
2
<PAGE>
(ii) Liquidation. In the event of any voluntary or involuntary
-----------
liquidation, dissolution or winding up of the Corporation, after distribution in
full of the preferential amounts to be distributed to the holders of shares of
Preferred Stock, the holders of shares of Common Stock shall be entitled to
receive all of the remaining assets of the Corporation available for
distribution to holders of Common Stock, ratably in proportion to the number of
shares of the Common Stock held by them.
(iii) A New Paragraph 6 to the Certificate of Incorporation, relating
to a compromise or arrangement between the Corporation and its creditors, is
added as follows:
"6. Whenever a compromise or arrangement is proposed between the Corporation
and its creditors or any class of them, any court of equitable jurisdiction
within the state of Delaware may, on the application in a summary way of this
corporation or of any creditor or stockholder thereof or on the application of
any receiver or receivers appointed for the Corporation under the provisions of
Section 291 of Title 8 of the Delaware Code or on the application of trustees in
dissolution or of any receiver or receivers appointed for the Corporation under
the provisions of Section 279 of Title 8 of the Delaware Code order a meeting of
the creditors or class of creditors, and/or of the stockholders or class of
stockholders of the Corporations, as the case may be, to be summoned in such
manner as the said court directs. If a majority in number representing
three-fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of the Corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of the
corporation as consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of the Corporation, as the case may be, and also on the
Corporation."
(iv) A new paragraph 7 to the Certificate of Incorporation, relating to
the indemnification of Directors and Officers is added as follows:
"7.(a) The Corporation shall, to the full extent permitted by Section 145 of
the Delaware General Corporation Law, as amended, from time to time, indemnify
all persons whom it may indemnify pursuant thereto.
(b) A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the directors
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived an improper
personal benefit.
3
<PAGE>
(c) Each person who was or is made a Party or is threatened to be made a
party to or is involved in any action, suit or proceeding, whether civil,
criminal, administrative, or investigative (hereinafter a "proceeding"), by
reason of the fact that he or she, or a person of whom he or she is the legal
representative, is or was a director or officer, of the Corporation or is or was
serving at the request of the Corporation as a director, officer, employee or
agent, of another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans, whether
the basis of such proceeding is alleged action in an official capacity as a
director, officer, employee or agent or in any other capacity while serving as a
director, officer, employee or agent, shall be indemnified and held harmless by
the Corporation to the fullest extent authorized by the Delaware General
Corporation Law, as the same exists or may hereafter be amended (but, in the
case of any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than said law permitted
the Corporation to provide prior to such amendment), against all expense,
liability and loss (including attorneys fees, judgments, fines, ERISA excise
taxes or penalties and amounts paid or to be paid in settlement) reasonably
incurred or suffered by such person in connection therewith and such
indemnification shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of his or her heirs,
executors and administrators; provided, however, that, except as provided in
-------- -------
paragraph (d) hereof, the Corporation shall indemnify and such persons seeking
indemnification in connection with a proceeding (or part thereof) which was
authorized by the board of directors of the Corporation. The right to
indemnification conferred in this Paragraph 7 shall be a contract right and
shall include the right to be paid by the Corporation the expenses incurred in
defending any such proceeding in advance of its final disposition; provided,
--------
however, that if the Delaware General Corporation Law requires, the payment of
- -------
such expenses incurred by a director or officer in his or her capacity as a
director or officer (and not in any other capacity in which service was or is
rendered by such person while a director or officer, including, without
limitation, service to an employee benefit plan) in advance of the final
disposition of a proceeding, shall be made only upon delivery to the Corporation
of an undertaking, by or on behalf of such director or officer, to repay all
amounts so advanced if it shall ultimately be determined that such director or
officer is not entitled to be indemnified under this paragraph 7 or otherwise.
The Corporation may, by action of its Board of Directors, provide
indemnification to employees and agents of the Corporation with the same scope
and effect as the foregoing indemnification of directors and officers.
4
<PAGE>
(d) If a claim under sub-paragraph (c) of this Paragraph 7 is not paid in
full by the Corporation within thirty days after a written claim has been
received by the Corporation, the claimant may at any time thereafter bring suit
against the Corporation to recover the unpaid amount of the claim and, if
successful in whole or in part, the claimant shall be entitled to be paid also
the expense of prosecuting such claim. It shall be a defense to any such action
(other than an action brought to enforce a claim for expenses incurred in
defending any proceeding in advance of its final disposition where the required
undertaking, if any is required, has been tendered to the Corporation) that the
claimant has not met the standards of conduct which make it permissible under
the Delaware General Corporation Law for the Corporation to indemnify the
claimant for the amount claimed, but the burden of proving such defense shall be
on the Corporation.; Neither the failure of the Corporation (including its Board
of Directors, independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such action that indemnification of
the claimant is proper in the circumstances because he or she has met the
applicable standard of conduct set forth in the Delaware General Corporation
Law, nor an actual determination by the Corporation (including its Board of
Directors, independent legal counsel, or its stockholders) that the claimant has
not met such applicable standard of conduct, shall be a defense to the action or
create a presumption that the claimant has not met the applicable standard of
conduct.
(e) The right to indemnification and the payment of expenses incurred in
defending a proceeding in advance of its final disposition conferred in this
Paragraph 7 shall not be exclusive of any other right which any person may have
or hereafter acquire under any statute, provision of the Certificate of
Incorporation, by-law, agreement, vote of stockholders or disinterested
directors or otherwise.
(f) The Corporation may maintain insurance, at its expense, to protect
itself and any director, officer, employee or agent of the Corporation or
another corporation, partnership, joint venture, trust or other enterprise
against any such expense liability or loss, whether or not the Corporation would
have the power to indemnify such person against such expense, liability or loss
under the Delaware Corporation Law."
(v) A new paragraph 8 to the Certificate of Incorporation relating to the
management of the Corporation is added as follows:
"8.a. The business affairs of the Corporation shall be managed by or under
the direction of the Board of Directors consisting of not less than two
directors. The number of directors which shall constitute the whole Board of
Directors shall be fixed by, or in the manner provided in, the By-laws.; and
5
<PAGE>
b. A director shall hold office until the annual meeting when his successor
shall be elected and shall qualify, subject, however, to prior death,
resignation, retirement, disqualification or removal from office. Any vacancy on
the Board of Directors that results from an increase in the number of directors
may be filled by a majority of the Board of Directors then in office, and any
other vacancy occurring in the Board of Directors may be filled by a majority of
the directors then in office, although less than a quorum, or by a sole
remaining director.
(vi) A new paragraph 9 to the Certificate of Incorporation relating to
meetings of stockholders of the Corporation is added as follows:
"9.a. Special meetings of the stockholders, for any purpose or purposes,
unless otherwise prescribed by statute, may be called (A) upon the written
request of the Chairman of the Board, the President or the Secretary; or (B) at
the written request of a majority of the Board of Directors.
b. For business to be properly brought before an annual or special meeting
by a stockholder, the stockholder must have given timely notice thereof in
writing to the Secretary of the Corporation. A stockholder's notice related to a
proposal to be presented at an annual or special meeting, to be timely, must be
received at the Corporation's principal executive offices not less than 60 days
nor more than 90 days prior to the meeting; provided, however, that if less than
70 days' notice or prior public disclosure of the date of the meeting is given
or made to stockholders, notice by the stockholder to be timely must be so
received not later than the close of business on the 10th day following the day
on which a notice of the date of the annual or special meeting, as the case may
be, was mailed or such public disclosure was made. A stockholder's notice to the
Secretary shall set forth as to each matter the stockholder proposes to bring
before the meeting (a) a brief description of the business desired to be brought
before the meeting and the reasons for conducting such business at the meeting,
(b) the name and address, as they appear on the Corporation's books, of the
stockholder proposing such business, (c) the class and number of shares of the
Corporation which are beneficially owned by the stockholder, and (d) any
material interest of the stockholder in such business. The Chairman of the
meeting shall, if the facts warrant, determine and declare to the meeting that
business was not properly brought before the meeting in accordance with the
provisions of this Article and if he should so determine, he shall so declare to
the meeting and any such business not properly brought before the meeting shall
not be transacted.
6
<PAGE>
c. Only persons who are nominated in accordance with the procedures set
forth in this Article 9 shall be eligible for election as Directors. Nominations
of persons for election to the Board of Directors of the Corporation may be made
at a meeting of stockholders by or at the direction of the Board of Directors or
by any stockholder of the Corporation entitled to vote for the election of
Directors at the meeting who complies with the notice procedures set forth in
this section. Such nominations, other than those made by or at the direction of
the Board of Directors, shall be made pursuant to timely notice in writing to
the Secretary of the Corporation. To be timely, a stockholder's notice shall be
received at the Corporation's principal executive offices not less than 60 days
nor more than 90 days prior to the meeting; provided, however, that if less than
70 days' notice or prior public disclosure of the date of the meeting is given
or made to stockholders, notice by the stockholder to be timely must be so
received not later than the close of business on the 10th day following the day
on which such disclosure was made. Such stockholder's notice shall set forth (a)
as to each person whom the stockholder proposes to nominate for election or
re-election as a Director, (i) the name, age, business address and residence
address of such person, (ii) the class and number of shares of the Corporation
which are beneficially owned by such person and (iv) any of the information
relating to such person that is required to be disclosed in solicitations of
proxies for election of Directors, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(including without limitation such persons' written consent to being named in
the proxy statement as a nominee and to serving as a Director if elected); and
(b) as to the stockholder giving the notice (i) the name and address, as they
appear on the Corporation's books, of such stockholder and (ii) the class and
number of shares of the Corporation which are beneficially owned by such
stockholder. At the request of the Board of Directors any person nominated by
the Board of Directors for election as a director shall furnish to the Secretary
of the Corporation that information required to be set forth in a stockholder's
notice of nomination which pertains to the nominee. No person shall be eligible
for election as a Director of the Corporation unless nominated in accordance
with the procedures set forth in this Section. The Chairman of the meeting
shall, if the facts warrant, determine and declare to the meeting that a
nomination was not made in accordance with the procedures prescribed by this
Article, and if he should so determine, he shall so declare to the meeting and
the defective nomination shall be disregarded."
(vii) A new paragraph 10 to the Certificate of Incorporation relating to
By-Laws; is added as follows:
"10. Power to make, alter, or repeal the By-Laws; and to adopt any new
By-Law, shall be vested in the Board of Directors,"
7
<PAGE>
(viii) A new paragraph 11 to the Certificate of Incorporation relating to
amendments is added as follows:
"11. From time to time any of the provisions of this Certificate of
Incorporation may be amended, altered or repealed, and other provisions
authorized by the laws of the State of Delaware at the time in force may be
added or inserted in the manner and at the time prescribed by said laws, and all
rights at any time conferred upon the stockholders of the Corporation by this
Certificate of Incorporation are granted subject to the provisions of this
Article 11."
12. The Corporation is to have perpetual existence.
SECOND: The amendments affected herein were authorized on October 14, 1994
by the consent in writing, setting forth the action so taken, signed by the
holders of at least a majority of all of the outstanding shares of the
corporation entitled to vote thereon pursuant to Section 228 of the General
Corporation Law of the State of Delaware.
THIRD: The amendments effected herein were duly adopted in accordance with
the applicable provisions of Section 242 of the General Corporation Law of the
State of Delaware.
IN WITNESS WHEREOF, the American Bingo & Gaming Corp. has caused this
Certificate of Amendment of Certificate of Incorporation to be signed by Greg
Wilson, its Chairman, and attested to by Robert Hersch, its Secretary this 18th
day of October, 1994.
AMERICAN BINGO & GAMING CORP.
/s/ Greg Wilson
-----------------
GREG WILSON, Chairman
ATTEST TO:
/s/ Robert Hersch
- -------------------
ROBERT HERSCH
8
<PAGE>
AMERICAN BINGO & GAMING CORP.
CERTIFICATE OF DESIGNATIONS OF
SERIES A CONVERTIBLE PREFERRED STOCK
(Pursuant to Section 151 of the General Corporation
Law of the State of Delaware)
American Bingo & Gaming Corp., a Delaware corporation (the "Corporation"),
in accordance with the provisions of Section 103 of the General Corporation Law
of the State of Delaware (the "DGCL") DOES HEREBY CERTIFY:
That pursuant to authority vested in the Board of Directors of the
Corporation (the "Board of Directors" or the "Board") by the Certificate of
Incorporation, as amended, of the Corporation, the Board of Directors, by
unanimous written consent dated July 29, 1997, adopted a resolution providing
for the creation of a series of the Corporation's Preferred Stock, $.01 par
value, which series is designated "Series A Convertible Preferred Stock", which
resolution is as follows:
RESOLVED, that pursuant to authority vested in the Board of Directors by
the Certificate of Incorporation, as amended, the Board of Directors does hereby
provide for the creation of a series of the Preferred Stock, $.01 par value
(hereafter called the "Preferred Stock"), of the Corporation, and to the extent
that the voting powers and the designations, preferences and relative,
participating, optional or other special rights thereof and the qualifications,
limitations or restrictions of such rights have not been set forth in the
Certificate of Incorporation, as amended, of the Corporation, does hereby fix
the same as follows:
The rights, preferences, privileges, and limitations granted to and imposed
on the Series A Convertible Preferred Stock (the "Series A Convertible Preferred
Stock"), which series shall consist of 3,000 shares, are as set forth below. The
following rights, preferences, privileges, and limitations are subject to the
designation, description, and terms of one or more subsequent series of
Preferred Stock by the Board of Directors of American Bingo & Gaming Corp., (the
"Corporation") pursuant to authority granted by the Certificate of
Incorporation. To the extent that the rights, preferences, privileges, and
limitations of any such subsequent series conflict or are inconsistent with any
of the rights, preferences, privileges, and limitations of the Series A
Convertible Preferred Stock, the designation and description of terms of the
subsequent series which is the latest so designated shall control and prevail
over the rights, preferences, privileges, and limitations of the Series A
Convertible Preferred Stock.
SECTION 1. DEFINITIONS. As used herein, the following terms shall have the
-----------
following meanings:
"AMEX" shall mean the American Stock Exchange, Inc.
"Board of Director" or "Board" shall mean the Board of Directors of the
Corporation.
<PAGE>
"Business Day" means any day other than a Saturday, Sunday or other day on
which commercial banks in The City of New York are authorized or required by law
to remain closed.
"Common Stock" shall mean the Common Stock, $.001 par value, of the
Corporation.
"Computed Price" of one share of Common Stock on any date shall mean the
product obtained by multiplying (a) the Conversion Percentage applicable on such
date times (b) the arithmetic average of the per share Market Price of the
-----
Common Stock for the Measurement Period with respect to the applicable dividend
payment date; provided, however, that in no event shall the Computed Price
-------- -------
determined in accordance with this clause (2) be greater than $5.50 (subject to
equitable adjustments for stock splits, stock dividends, combinations,
recapitalizations, reclassifications and similar events occurring on or after
the date of filing of this Certificate of Designations with the Secretary of
State of the State of Delaware).
"Conversion Agent" shall mean American Stock Transfer & Trust Company, or
its duly appointed successor.
"Conversion Amount" initially shall be equal to $1,000.00, subject to
adjustment as hereinafter provided.
"Conversion Date" shall mean the date on which the notice of conversion is
actually received by the Conversion Agent, whether by mail, courier, personal
service, telephone line facsimile transmission, or other means, in case of a
conversion at the option of the holder pursuant to Section 10(a).
"Conversion Deferral Notice" shall mean a notice given by the Corporation
to the Holders of Series A Convertible Preferred Stock pursuant to Section
10(a)(iii), which notice shall state (1) that the Corporation is exercising its
right to defer conversion of all or a portion of the Excess Shares pursuant to
Section 10(a)(iii), (2) the number of Excess Shares held by such holder as to
which conversion is deferred, and (3) the Conversion Value per unredeemed Excess
Share or the formula for determining the same, determined in accordance with
Section 10(a)(iii).
"Conversion Notice" shall mean a written notice, duly signed by or on
behalf of the holder, stating the number of shares of Series A Convertible
Preferred Stock to be converted in the form specified in the Subscription
Agreement.
"Conversion Percentage" shall mean 80%.
"Conversion Rate" shall have the meaning provided in Section 10(a).
"Conversion Value" initially shall be equal to $1,000.00, subject to
adjustment as provided in Section 10(a)(iii).
2
<PAGE>
"Converting Holder" shall mean a holder of Series A Preferred Stock who
delivers to the Corporation a Conversion Notice.
"Current Market Price" shall mean with respect to any date the arithmetic
average of the Market Price of the Common Stock on the 30 consecutive trading
days commencing 45 trading days before such date.
"Excess Shares" shall have the meaning set forth in Section 9.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"First Conversion Period" shall mean the period beginning on the 90th day
after the Issuance Date and ending on the 134th day after the Issuance Date.
"Floor Price" shall mean $4.00 per share subject to equitable adjustment
from time to time, on terms reasonably acceptable to the holders of a majority
of the outstanding shares of Series A Convertible Preferred Stock, for (i) stock
splits, (ii) stock dividends, (iii) combinations (iv) capital reorganizations,
(v) issuance to all holders of Common Stock of rights or warrants to purchase
shares of Common Stock at a price per share less than the Market Price which
would otherwise be applicable, (vi) the distribution by the Company to all
holders of Common Stock of evidences of indebtedness of the Company or cash
(other than regular quarterly cash dividends), (vii) tender offers by the
Company or any subsidiary of the Company or other repurchases of shares of
Common Stock on one or more transaction which, individually or in the aggregate,
result in the purchase of more than 10% or the Common Stock outstanding and
(viii) similar events relating to the Common Stock, in each such case which
occur during the Measurement Period.
"Floor Price Amount" shall mean the number of shares of Common Stock which
would be issuable to a Converting Holder on any Conversion Date, assuming that
the Preferred Shares surrendered for conversion by such Converting Holder were
converted at the Floor Price.
"Floor Price Shares" shall mean the number of shares of Series A Preferred
Stock which, if converted at the Conversion Price, would be convertible into a
number of shares of Common Stock equal to the Floor Price Amount.
"Fourth Conversion Period" shall mean the period beginning on the 240th day
after the Issuance Date.
"Inconvertibility Notice" shall have the meaning provided in Section
7(a)(2).
"Issuance Date" shall mean the first date of original issuance of any share
of Series A Convertible Preferred Stock.
"Junior Dividend Stock" shall mean, collectively, the Common Stock and any
other class or series of capital stock of the Corporation, ranking junior as to
dividends to the Series A Convertible Preferred Stock.
3
<PAGE>
"Junior Liquidation Stock" shall mean the Common Stock or any other class
or series of the Corporation's capital stock, ranking junior as to liquidation
rights to the Series A Convertible Preferred Stock.
"Liquidation Preference" shall mean, for each share of Series A Convertible
Preferred Stock, the sum of (i) all dividends accrued and unpaid thereon to the
date of final distribution to such holders, (ii) accrued and unpaid interest on
dividends in arrears (computed in accordance with Section 5(a)) to the date of
distribution, and (iii) $ 1,000.00.
"Market Price" of any security on any date shall mean the closing high bid
price of such security on such date on the principal securities exchange or
other market on which such security is listed for trading, as reported by such
exchange or other market; provided, however, that if during any Measurement
-------- -------
Period:
(i) The Corporation shall declare or pay a dividend or make a
distribution to all holders of the outstanding Common Stock in shares of Common
Stock or fix any record due for any such action, then the Market Price of the
Common Stock for each day in such Measurement Period prior to the earlier of (1)
the date fixed for the determination of stockholders entitled to receive such
dividend or other distribution and (2) the date on which ex-dividend trading in
the Common Stock with respect to such dividend or distribution begins shall be
reduced by multiplying the Market Price (determined without regard to this
proviso) for each such day in such Measurement Period by a fraction of which the
numerator shall be the number of shares of Common Stock outstanding at the close
of business on the earlier of (1) the record date fixed for such determination
and (2) the date on which ex-dividend trading in the Common Stock with respect
to such dividend or distribution begins and the denominator shall be the sum of
such number of shares and the total number of shares constituting such dividend
or other distribution;
(ii) The Corporation shall issue rights or warrants to all holders of
its outstanding shares of Common Stock, or fix a record date for such issuance,
which rights or warrants entitle such holders (for a period expiring within
forty-five (45) days after the date fixed for the determination of stockholders
entitled to receive such rights or warrants) to subscribe for or purchase shares
of Common Stock at a price per share less than the Market Price (determined
without regard to this proviso) for any day in such Measurement Period which is
prior to the end of such 45-day period, then the Market Price for such day shall
be reduced so that the same shall equal the price determined by multiplying the
Market Price (determined without regard to this proviso) by a fraction of which
the numerator shall be the number of shares of Common Stock outstanding at the
close of business on the record date fixed for the determination of stockholders
entitled to receive such rights or warrants plus the number of shares which the
aggregate offering price of the total number of shares so offered would purchase
at such Market Price, and of which the denominator shall be the number of shares
of Common Stock outstanding on the close of business on such record date plus
the total number of additional shares of Common Stock so offered for
subscription or purchase. In determining whether any rights or warrants entitle
the holders to subscribe for or purchase shares of Common Stock at less than the
Market Price (determined without regard to this proviso), and in determining the
aggregate offering price of such shares of Common Stock, there shall be taken
into account any consideration received for such rights or warrants, the value
of such consideration, if other than cash, to be determined in good faith by a
resolution of the Board of Directors of the Corporation;
4
<PAGE>
(iii) The outstanding shares of Common Stock shall be subdivided into a
greater number of shares of Common Stock or a record date for any such
subdivision shall be fixed, then the Market Price of the Common Stock for each
day in such Measurement Period prior to the earlier of (1) the day upon which
such subdivision becomes effective and (2) the date on which ex-dividend trading
in the Common Stock with respect to such subdivision begins shall be
proportionately reduced, and conversely, in case the outstanding shares of
Common Stock shall be combined into a smaller number of shares of Common Stock,
the Market Price for each day in such Measurement Period prior to the day upon
which such combination becomes effective shall be proportionately increased;
(iv) The Corporation shall, by dividend or otherwise, distribute to all
holders of its Common Stock shares of any class of capital stock of the
Corporation (other than any dividends or distributions to which clause (i) of
this proviso applies) or evidences of its indebtedness, cash or other asset
(including securities, but excluding any rights or warrants referred to in
clause (ii) of this proviso and dividends and distributions paid exclusively in
cash and excluding any capital stock, evidences of indebtedness, cash or assets
distributed upon a merger or consolidation) (the foregoing hereinafter in this
clause (iv) of this proviso called the "Securities"), or fix a record date for
any such distribution, then, in each such case, the Market Price for any day in
such Measurement Period prior to the earlier of (1) the record date for such
distribution and (2) the date on which ex-dividend trading in the Common Stock
with respect to such distribution begins shall be reduced so that the same shall
be equal to the price determined by multiplying the Market price (determined
without regard to this proviso) by a fraction of which the numerator shall be
the Market Price (determined without regard to this proviso) on such date less
the fair market value (as determined in good faith by resolution of the Board of
Directors of the Corporation) on such date of the portion of Securities so
distributed or to be distributed to one share of Common Stock and the
denominator shall be the Market Price (determined without regard to this
proviso); provided, however that in the event the then fair market value (as so
-------- -------
determined) of the portion of the Securities so distributed applicable to one
share of Common Stock is equal to or greater than the Market Price (determined
without regard to this clause (iv) of this proviso) on any such day, in lieu of
the foregoing adjustment, adequate provision shall be made so that the holders
of shares of Series A Convertible Preferred Stock shall have the right to
receive in payment of dividends on the share of Series A Convertible Preferred
Stock or upon conversion of the shares of Series A Convertible Preferred Stock,
as the case may be, the amount of Securities the holders of shares of Series A
Convertible Preferred Stock would have received had the number of shares of
Common Stock to be issued in payment of such dividends on the shares of Series A
Convertible Preferred Stock, or had the holder of shares of Series A Convertible
Preferred Stock converted the shares of Series A Convertible Preferred Stock, in
either such case immediately prior to the record date for such distribution. If
the Board of Directors of the Corporation determines the fair market value of
any distribution for purposes of this clause (iv) by reference to the actual or
when issued trading market for any securities comprising all or put of such
distribution, it must in doing so consider the prices in such market on the same
day for which an adjustment in the Market Price is being determined.
5
<PAGE>
For purposes of this clause (iv) and clauses (i) and (ii) of this proviso,
any dividend or distribution to which this clause (iv) is applicable that also
includes shares of Common Stock, or rights or warrants to subscribe for or
purchase shares of Common Stock to which clause (ii) of this proviso applies (or
both), shall be deemed instead to be (1) a dividend or distribution of the
evidences of indebtedness, assets, shares of capital stock, rights or warrants
other than such shares of Common Stock or rights or warrants to which clause
(ii) of this proviso applies (and any Market Price reduction required by this
clause (iv) with respect to such dividend or distribution shall then be made)
immediately followed by (2) a dividend or distribution of such shares of Common
Stock or such rights or warrants (and any further Market Price reduction
required by clauses (i) and (ii) of this proviso with respect to such dividend
or distribution shall then be made), except that any shares of Common Stock
included in such dividend or distribution shall not be deemed "outstanding at
the close of business on the date fixed for such determination" within the
meaning of clause (i) of this proviso;
(v) The Corporation or any subsidiary of the Corporation shall (x) by
dividend or otherwise, distribute to all holders of its Common Stock cash in (or
fix any record date for any such distribution), or (y) repurchase or reacquire
shares of its Common Stock (other than shares surrendered in payment of the
exercise price or tax obligations incurred in connection with the exercise of a
stock option issued to any of the Corporation's employees, directors, or
consultants; each, an "Option Share Surrender") for, in either case, an
aggregate amount that, combined with (1) the aggregate amount of any other such
distributions to all holders of its Common Stock made exclusively in cash after
Issuance Date and within the twelve (12) months preceding the date of payment of
such distribution, and in respect of which no adjustment pursuant to this clause
(v) has been made, (2) the aggregate amount of any cash plus the fair market
value (as determined in good faith by a resolution of the Board of Directors of
the Corporation) of consideration paid in respect of any repurchase or other
reacquisition by the Corporation or any subsidiary of the Corporation of any
shares of Common Stock (other than an Option Share Surrender) made after the
Issuance Date and within the twelve (12) months preceding the date of payment of
such distribution or making of such repurchase or reacquisition, as the case
may be, and in respect of which no adjustment pursuant to this clause (v) has
been made, and (3) the aggregate of any cash plus the fair market value (as good
faith by a resolution of the Board of Directors of the Corporation) of
consideration payable in respect of any tender offer by the Corporation or any
of its subsidiaries for all or any portion of the Common Stock concluded within
the twelve (12) months preceding the date of payment of such distribution or
completion of such repurchase or reacquisition, as the case may be, and in
respect of which no adjustment pursuant to clause (vi) of this proviso has been
6
<PAGE>
made, exceeds 10% of the product of the Market Price (determined without regard
to this proviso) on any day in such Measurement Period prior to the earlier of
(1) the record date with respect to such distribution and (2) the date on which
ex-dividend trading in the Common Stock with respect to such distribution begins
or the date of such repurchase or reacquisition, as the case may be, times the
number of shares of Common Stock outstanding on such date, then, and in each
such case, the Market Price for such day shall be reduced so that the same shall
equal the price determined by multiplying the Market Price (determined without
regard to this proviso) for such day by a fraction (i) the numerator of which
shall be equal to the Market Price (determined without regard to this proviso)
for such day less an amount equal to the quotient of (x) the excess of such
combined amount over such 10% and (y) the number of shares of Common Stock
outstanding on such day and (ii) the denominator of which shall be equal to the
Market Price (determined without regard to proviso) on such day; provided,
--------
however that in the event the portion of the cash so distributed or paid for the
- -------
repurchase or reacquisition of shares (determined per share based on the number
of shares of Common Stock outstanding) applicable to one share of Common Stock
is equal to or greater than the Market Price (determined without regard to this
clause (v) of this proviso) of the Common Stock on any such day, in lieu of the
foregoing adjustment, adequate provision shall be made so that the holders of
shares of Series A Convertible Preferred Stock shall have the right to receive
in payment of dividends on shares of Series A Convertible Preferred Stock or
upon conversion of shares of Series A Convertible Preferred Stock, as the case
may be, the amount of cash the holders of shares of Series A Convertible
Preferred Stock would have received had the number of shares of Common Stock to
be issued in payment of such dividends on shares of Series A Convertible
Preferred Stock, or had the holders of shares of Series A Convertible Preferred
Stock converted shares of Series A Convertible Preferred Stock, in either such
case, immediately prior to the record date for such distribution or the payment
date of such repurchase, as applicable; or
(vi) A tender offer made by the Corporation or any of its subsidiaries
for all or any portion of the Common Stock shall expire and such tender offer
(as amended upon the expiration thereof) shall require the payment to
stockholders (based on the acceptance (up to any maximum specified in the terms
of the tender offer) of Purchased Shares (as defined below)) of an aggregate
consideration having a fair market value (as determined in good faith by
resolution of the Board of Directors of the Corporation) that combined together
with (1) the aggregate of the cash plus the fair market value (as determined in
good faith by a resolution of the Board of Directors of the Corporation), as of
the expiration of such tender offer, of consideration payable in respect of any
other tender offer, by the Corporation or any of its subsidiaries for all or any
portion of the Common Stock expiring within the twelve (12) months preceding the
expiration, of such tender offer and in respect of which no adjustment pursuant
to this clause (vi) has been made, (2) the aggregate amount of any cash plus the
fair market value (as determined in good faith by a resolution of the Board of
Directors of the Corporation) of consideration paid in respect of any repurchase
or other reacquisition by the Corporation or any subsidiary of the Corporation
of any shares of Common Stock (other than an Option Share Surrender) made after
the Issuance Date and within the twelve (12) months preceding the expiration of
such tender offer and in respect of which no adjustment pursuant to this clause
7
<PAGE>
(vi) has been made, and (3) the aggregate amount of any distributions to all
holders of the Corporation's Common Stock made exclusively in cash within twelve
(12) months preceding, the expiration of such tender offer and in respect of
which no adjustment pursuant to clause (v) of this proviso has been made,
exceeds 10% of the product of the Market Price (determined without regard to
this proviso) on any day in such period times the number of shares of Common
Stock outstanding on such day, then, and in each such case, the Market Price for
such day shall be reduced so that the same shall equal the price determined by
multiplying the Market Price (determined without regard to this proviso) for
such day by a fraction of which the numerator shall be the number of shares of
Common Stock outstanding on such day multiplied by the Market Price (determined
without regard to this proviso) for such day and the denominator shall be the
sum of (x) the fair market value (determined as aforesaid) of the aggregate
consideration payment to stockholders based on the acceptance (up to any maximum
specified in the terms tender offer) of all shares validly tendered and not
withdrawn as of the last time tenders could have been made pursuant to such
tender offer (the "Expiration Time") (the shares deemed so accepted, up to any
such maximum being referred to as the "Purchased Shares") and (y) the product of
the number of shares of Common Stock outstanding (less any Purchased Shares) on
such day and the Market Price determined without regard to this proviso) of the
Common Stock on the trading day next succeeding the Expiration Time. If the
application of this clause (vi) to any tender offer would result in an increase
in the market Price (determined without regard to this proviso) for any day, no
adjustment shall be made for such tender offer under this clause (vi) for such
day;
provided further, however, that if on any date there shall be no reported
- -------- -------
closing high bid price of such security, the "Market Price" on such date shall
- ------
be the closing high bid of such security on the date next preceding such date on
which a closing high bid price for such security has been so reported; provided
--------
further, however, that if on any date there shall be no reported closing high
- ------- -------
bid price of such security and at the time the closing high bid price for such
date is being determined there shall be known a closing high bid price so
reported for the date next subsequent to such date on which a closing high bid
price shall have been so reported, then the Market Price on such date for which
there shall have been no reported closing high bid price shall be the lower of
(x) the Market Price as determined pursuant to the second proviso to this
definition and (y) the closing high bid price as so reported for such succeeding
day for which a closing high bid price as so reported is known.
"Maximum Share Amount" shall mean 937,450 shares, or such greater number as
would be permitted by the rules which are proposed to be adopted by the Nasdaq
(such amount to be subject to equitable adjustment from time to time for stock
splits, stock dividends, combinations, capital reorganizations and similar
events relating to the Common Stock occurring after the date of filing this
Certificate of Designations with the Secretary of State of the State of
Delaware), of Common Stock.
"Measurement Period" shall mean, with respect to any date, the period of
twenty (20) consecutive days ending one day prior to such date.
"Nasdaq" shall mean the Nasdaq Small Cap Market.
8
<PAGE>
"NYSE" shall mean the New York Stock Exchange, Inc.
"Parity Dividend Stock" shall mean any class or series or the Corporation's
Capital stock ranking, as to dividends, on a parity with the Series A
Convertible Preferred Stock.
"Parity Liquidation Stock" shall mean any class or series of the Corporation's
capital stock having parity as to liquidation rights with the Series A
Convertible Preferred Stock.
"Redemption Date" shall mean the date of a redemption of share of Series A
Convertible Preferred Stock pursuant to Section 9, determined in accordance
therewith.
"Redemption Notice" shall mean a notice given by the Corporation to the
holders of Series A Convertible Preferred Stock pursuant to Section 9, which
notice shall state (1) that the Corporation is exercising its right to redeem
all or a portion of the Excess Shares pursuant to Section 9, (2) the number of
Excess Shares held by such holder which are to be redeemed, (3) the Redemption
Price per share of Series A Convertible Preferred Stock to be redeemed or the
formula for determining the same, determined in accordance herewith and (4) the
applicable Redemption Date.
"Redemption Price" shall mean the greater of (i) the sum of (a) the sum of
(1) the Conversion Value, (2) an amount equal to the accrued and unpaid
dividends on such share of Series A Convertible Preferred Stock, and (3) an
amount equal to the accrued and unpaid interest on dividends in arrears
(determined as provided in Section 5) through the Redemption Date plus (b) an
----
amount equal to the product obtained by multiplying (x) the sum stated in the
immediately preceding clause (a) times (y) the quotient (expressed as a
-----
percentage) obtained by dividing (A) the amount determined by subtracting from
100 percent the Conversion Percentage in effect on the Redemption Date by (B)
the Conversion Percentage in effect on the Redemption Date and (ii) an amount
equal to the product obtained by multiplying (x) the number of shares of Common
Stock which would, but for the redemption pursuant to Section 9, be issuable on
conversion in accordance with Section 10(a) of one share of Series A Convertible
Preferred Stock and any accrued and unpaid dividends thereon and any accrued and
unpaid interest on dividends thereon in arrears if a Conversion Notice were
given by the holder of such share of Series A Convertible Preferred Stock on the
Redemption Date (determined without regard to any limitation on conversion
contained in Section 10(a)) times (y) the arithmetic average of the Market Price
-----
of the Common Stock for the twenty consecutive trading days ending one trading
day prior to the Redemption Date.
"Restricted Person" shall have the meaning provided in Section 10(a).
"Second Conversion Period" shall mean the period beginning on the 135th day
after the Issuance Date and ending on the 179th day after the Issuance Date.
"SEC" shall mean the United States Securities and Exchange Commission.
"Senior Dividend Stock" shall mean any class or series of capital stock of
the Corporation ranking senior as to dividends to the Series A Convertible
Preferred Stock.
9
<PAGE>
"Senior Liquidation Stock" shall mean any class or series of capital stock
of the orporation ranking senior as to liquidation rights to the Series A
Convertible Preferred Stock.
"Series A Convertible Preferred Stock" shall mean the Series A Convertible
Preferred Stock of the Corporation.
"Share Limitation Redemption Date" shall mean each date on which the
Corporation is required to redeem shares of Series A Convertible Preferred Stock
as provided in this Section 7(a).
"Share Limitation Redemption Price" shall mean the greater of (i) the sum
of (a) the sum of (1) the Conversion Value, (2) an amount equal to the accrued
but unpaid dividends on the share of Series A Convertible Preferred Stock to be
redeemed pursuant to Section 7(a), and (3) an amount to the accrued and unpaid
interest on dividends in arrears on such share of Series A Convertible Preferred
Stock through the applicable Share Limitation Redemption Date (as provided in
Section 5) plus (b) an amount equal to the product obtained by multiplying (x)
----
the sum stated in the immediately preceding clause (a) times (y) the quotient
-----
(expressed as a percentage) obtained by dividing (A) the amount determined by
subtracting from 100 percent the Conversion Percentage in effect on the
applicable Share Limitation Redemption Date by (B) the Conversion Percentage in
--
effect on the applicable Share Limitation Redemption Date and (ii) an amount
equal to the product obtained by multiplying (x) the number of shares of Common
Stock which would, but for the redemption pursuant to Section 7(a), be issuable
on conversion in accordance with Section 10(a) of one share of Series A
Convertible Preferred Stock and any accrued and unpaid dividends thereon and any
accrued and unpaid interest on dividends thereon in arrears if a Conversion
Notice were given by the holder of such share of Series A Convertible Preferred
Stock on the applicable Share Limitation Redemption Date (determined without
regard to any limitation on conversion contained in Section 10(a)) times (y) the
-----
arithmetic average of the Market Price of the Common Stock for the five
consecutive trading days ending one trading day prior to the applicable Share
Limitation Redemption Date.
"Stockholder Approval" shall mean the approval by a majority of the votes
cast by the holders of shares of Common Stock (in person or by proxy) at a
meeting of the stockholders of the Corporation (duly convened at which a quorum
was present), or a written consent of holders of shares of Common Stock entitled
to such number of votes given without a meeting, of the issuance by the
Corporation of 20% or more of the Common Stock of the Corporation outstanding on
the Issuance Date for less than the greater of the book or market value of such
Common Stock on conversion of the Series A Convertible Preferred Stock, as and
to the extent required under rules proposed to be adopted by the Nasdaq.
"Subscription Agreement" shall mean the Subscription Agreement between the
Corporation and the original holder of shares of Series A Convertible Preferred
Stock pursuant to which the shares of Series A Convertible Preferred Stock were
issued.
"Tender Offer" means a tender offer or exchange offer.
10
<PAGE>
"Third Conversion Period" shall mean the period beginning on the 180th day
after the Issuance Date and ending on the 239th day after the Issuance Date.
SECTION 2. DESIGNATION AND AMOUNT. The shares of such series shall be
------------------------
designated as "Series A Convertible Preferred Stock", and the number of shares
constituting the Series A Convertible Preferred Stock shall be 3,000, and shall
not be subject to increase.
SECTION 3. STATED CAPITAL. The amount to be represented in stated capital
--------------
at all times for each share of Series A Convertible Preferred Stock shall be the
greater of (i) the sum of (a) the sum of (1) $1,000, (2) to the extent legally
available, the accrued but unpaid dividends on such share of Series A
Convertible Preferred Stock, and (3) an amount equal to the accrued and unpaid
interest on dividends in arrears (as provided in Section 5) through the date of
determination plus (b) an amount equal to the product obtained by multiplying
----
(x) the sum stated in the immediately preceding clause (a) times (y) the
-----
quotient (expressed as a percentage) obtained by dividing (A) the amount
determined by subtracting from 100 percent the Conversion Percentage in effect
on such date of determination by (B) the Conversion Percentage in effect on such
--
date of determination and (ii) an amount equal to the product obtained by
multiplying (x) the number or shares of Common Stock which would, at the time of
such determination, be issuable on conversion in accordance with Section 10(a)
of one share of Series A Convertible Preferred Stock and any accrued and unpaid
dividends thereon and any accrued and unpaid interest on dividends thereon in
arrears if a Conversion (as defined herein) were given by the holder of such
share of Series A Convertible Preferred Stock on the date of such determination
(determined without regard to any limitation on conversion contained in 10(a))
times (y) the arithmetic average of the Market Price of the Common Stock for the
----
five consecutive trading days ending one trading day prior to the date of such
determination. The Corporation shall take such action as may be required to
maintain the amount required by this Section 3 to be represented in stated
capital for the Series A Convertible Preferred Stock not less frequently than
monthly.
SECTION 4. RANK. All Series A Convertible Preferred Stock shall rank (i)
----
senior to the Common Stock, now or hereafter issued, as to payment of dividends
and distribution of assets upon liquidation, dissolution, or winding up of the
Corporation, whether voluntary or involuntary, (ii) on a parity with any
additional series of the class of Preferred Stock which series the Board of
Directors may from time to time authorize, both as to payment of dividends and
as to distributions of assets upon liquidation, dissolution, or winding up of
the Corporation, whether voluntary or involuntary, (iii) on a parity with the
shares of any additional class of preferred stock (or series of preferred stock
of such class) which the Board of Directors or the stockholders may from time to
time authorize in accordance herewith, which class (or series thereof) by its
terms ranks on a parity with the shares of Series A Convertible Preferred Stock
and (iv) senior to any other class or series of preferred stock (other than as
stated in the immediately preceding clauses (ii) and (iii)) of the Corporation.
11
<PAGE>
SECTION 5. DIVIDENDS AND DISTRIBUTIONS. (a) The holders of shares of
-----------------------------
Series A Convertible Preferred Stock shall be entitled to receive, when, as, and
if declared by the Board of Directors out of funds legally available for such
purpose, dividends at the rate of $70.00 per annum per share, and no more, which
shall be fully cumulative, shall accrue without interest (except as otherwise
provided herein as to dividends in arrears) from the date of original issuance
until the second anniversary of the Issuance Date and shall be payable quarterly
on February 1, May 1, August 1, and November 1 of each year commencing November
1, 1997 (except that if any such date is a Saturday, Sunday, or legal holiday,
then such dividend shall be payable on the next succeeding day that is not a
Saturday, Sunday, or legal holiday) to holders of record as they appear on the
stock books of the Corporation on such record dates, not more than 20 nor less
than 10 days preceding the payment dates for such dividends, as shall be fixed
by the Board. Dividends on the Series A Convertible Preferred Stock shall be
paid in cash or, subject to the limitations in Section 5(b) hereof, shares of
Common Stock of the Corporation or any combination of cash and shares of Common
Stock, at the option of the Corporation as hereinafter provided. The amount of
the dividends payable per share of Series A Convertible Preferred Stock for each
quarterly dividend period shall be computed by dividing the annual dividend
amount by four. The amount of dividends payable for the initial dividend period
and any period shorter than a full quarterly dividend period shall be computed
on the basis of a 360-day year of twelve 30-day months. Dividends not paid on a
payment date, whether or not such dividends have been declared, will bear
interest at the rate of 12% per annum until paid. No dividends or other
distributions, other than the dividends payable solely in shares of any Junior
Dividend Stock, shall be paid or set apart for payment on any shares of Junior
Dividend Stock, and no purchase, redemption, or other acquisition shall be made
by the Corporation of any shares of Junior Dividend Stock unless and until all
accrued and unpaid dividends on the Series A Convertible Preferred Stock and
interest on dividends in arrears at the rate specified herein shall have been
paid or declared and set apart for payment.
If at any time any dividend on any the Senior Dividend Stock shall be in
default, in whole or in part, no dividend shall be paid or declared and set
apart for payment on the Series A Convertible Preferred Stock unless and until
all accrued and unpaid dividends with respect to the Senior Dividend Stock,
including the full dividends for the then current dividend period, shall have
been paid or declared and set apart for payment, without interest. No full
dividends shall be paid or declared and set apart for payment on any Parity
Dividend Stock for any period unless all accrued but unpaid dividends (and
interest on dividends in arrears at the rate specified herein) have been, or
contemporaneously are, paid or declared and set apart for such payment on the
Series A Convertible Preferred Stock. No full dividends shall be paid or
declared and set apart for payment on the Series A Convertible Preferred Stock
for any period unless all accrued but unpaid dividends have been, or
contemporaneously are, paid or declared and set apart for payment on the Parity
Dividend Stock for all dividend periods terminating on or prior to the date of
payment of such full dividends. When dividends are not paid in full upon the
Series A Convertible Preferred Stock and the Parity Dividend Stock, all
dividends paid or declared and set apart for payment upon shares of Series A
Convertible Preferred Stock (and interest on dividends in arrears at the rate
specified herein) and the Parity Dividend Stock shall be paid or declared and
set apart for payment pro rata, so that the amount of dividends paid or declared
and set apart for payment per share on the Series A Convertible Preferred Stock
and the Parity Dividend Stock shall in all cases bear to each other the same
ratio that accrued and unpaid dividends per share on the shares of Series A
Convertible Preferred Stock and the Parity Dividend Stock bear to each other.
12
<PAGE>
Any references to "distribution" contained in this Section 5 shall not be
deemed to include any stock dividend or distributions made in connection with
any liquidation, dissolution, or winding up of the Corporation, whether
voluntary or involuntary.
(b) If the Corporation elects in the exercise of its sole discretion to
issue shares of Common Stock in payment of dividends on the Series A Convertible
Preferred Stock, the Corporation shall issue and dispatch, or cause to be issued
and dispatched, by the fifth trading day after such dividend payment date to
each holder of such shares a certificate representing the number of whole shares
of Common Stock arrived at by dividing the per share Computed Price of such
shares of Common Stock into the total amount of cash dividends such holder would
be entitled to receive if the aggregate dividends on the Series A Convertible
Preferred Stock held by such holder which are being paid in shares of Common
Stock were being paid in cash; provided, however, that if certificates
-------- -------
representing shares of Common Stock are issued and dispatched to holders of
Series A Convertible Preferred Stock subsequent to the fifth trading day after a
dividend payment date, the percentage used to calculate the Computed Price will
be reduced by one percentage point for each trading day after the third trading
day following such dividend payment date to the date of dispatch of shares of
Common Stock. No fractional shares of Common Stock shall be issued in payment
of dividends. In lieu thereof, the Corporation shall pay cash in an amount equal
to the product of (x) the Market Price of the Common Stock for the Measurement
Period applicable to such dividend times (y) the fraction of a share of Common
-----
Stock which would otherwise be issuable by the Corporation. The Corporation
shall not exercise its right to issue shares of Common Stock in payment of
dividends on Series A Convertible Preferred Stock if:
(i) the number of shares of Common Stock at the time authorized,
unissued and unreserved for all purposes, or held in the Corporation's treasury,
is insufficient to pay the portion of such dividends to be paid in shares of
Common Stock;
(ii) the issuance or delivery of shares of Common Stock as a dividend
payment would require registration with or approval of any governmental
authority under any law or regulation, and such registration or approval has not
been effected or obtained;
(iii) the shares of Common Stock to be issued as a dividend payment
have not been authorized for listing, upon official notice of issuance, on any
securities exchange or market on which the Common Stock is then listed; or have
not been approved for quotation if the Common Stock is traded in the
over-the-counter market;
(iv) the Computed Price (determined without regard to the proviso to
the definition thereof) is less than the par value of one share of Common stock;
(v) the shares of Common Stock (A) cannot be sold or transferred
without restriction by unaffiliated holders who receive such shares of Common
Stock as a dividend payment or (B) are no longer listed on a national securities
exchange, on the Nasdaq National Market or the Nasdaq SmallCap Market; or
13
<PAGE>
(vi) the issuance of shares of Common Stock in payment of dividends on
Series A Convertible Preferred Stock held by any Restricted Person would result
in any Restricted Person beneficially owning more than 4.9% of the Common Stock,
determined as provided in the proviso to the second sentence of Section 10(a)
hereof.
Shares of Common Stock issued in payment of dividends on Series A
Convertible Preferred Stock pursuant to this Section shall be, and for all
purposes shall be deemed to be, validly issued, fully paid and nonassessable
shares of Common stock of the Corporation; the issuance and delivery thereof is
hereby authorized, and the dispatch thereof will be, and for all purposes shall
be deemed to be, payment in full of the cumulative dividends to which holders
are entitled on the applicable dividend payment date.
(c) Neither the Corporation nor any subsidiary of the Corporation shall
redeem, repurchase or otherwise acquire in any one transaction or series of
related transactions any shares of Common Stock, Junior Dividend Stock or Junior
Liquidation Stock if the number of shares so repurchased, redeemed or otherwise
acquired in such transaction or series of related transactions (excluding any
Option Share Surrender) is more than either (x) 5.0% of the number of shares of
Common Stock, Junior Dividend Stock or Junior Liquidation Stock, as the case may
be, outstanding immediately prior to such transaction or series of related
transactions or (y) 1% of the number of shares of Common Stock, Junior Dividend
Stock or Junior Liquidation Stock, as the case may be, outstanding immediately
prior to such transaction or series of related transactions if such transaction
or series of related transactions is with any one person or group of affiliated
persons, unless the Corporation or such subsidiary offers to purchase for cash
from each holder of shares of Series A Convertible Preferred Stock at the time
of such redemption, repurchase or acquisition the same percentage of such
holder's shares of Series A Convertible Preferred Stock as the percentage of the
number of outstanding shares of Common Stock, Junior Dividend Stock or Junior
Liquidation Stock, as the case may be, to be so redeemed, repurchased or
acquired at a purchase price per share of Series A Convertible Preferred Stock
equal to the greater of (i) the sum of (a) the sum of (1) the Conversion Value,
(2) an amount equal to the accrued but unpaid dividends on such share of Series
A Convertible Preferred Stock, plus (3) an amount equal to the accrued and
----
unpaid interest on dividends in arrears (determined as provided in Section 5)
through the date of purchase pursuant to this Section 5(c) plus (b) an amount
----
equal to the product obtained by multiplying (x) the sum stated in the
immediately preceding clause (a) times (y) the quotient (expressed as a
-----
percentage) obtained by dividing (A) the amount determined by subtracting from
100 percent the Conversion Percentage in effect on the date of purchase pursuant
to this Section 5(c) by (B) the Conversion Percentage in effect on the date of
--
purchase pursuant to this Section 5(c) and (ii) an amount equal to the product
obtained by multiplying (x) the number of shares of Common Stock which would,
but for the purchase pursuant to this Section 5(c), be issuable on conversion in
accordance with Section 10(a) of one share of Series A Convertible Preferred
Stock and any accrued and unpaid dividends thereon and any accrued and unpaid
interest on dividends thereon in arrears if a Conversion Notice were given by
the holder of such share of Series A Convertible Preferred Stock on the date of
purchase pursuant to this Section 5(c) (determined without regard to any
limitation on conversion contained in Section 10(a)) times (y) the arithmetic
-----
average of the Market Price of the Common Stock for the Measurement Period with
respect to the date of purchase pursuant to this Section 5(c).
14
<PAGE>
(d) Neither the Corporation nor any subsidiary of the Corporation shall
(1) make any Tender Offer for outstanding shares of Common Stock, unless the
Corporation contemporaneously therewith makes an offer, or (2) enter into an
agreement regarding a Tender Offer for outstanding shares of Common Stock by any
person other than the Corporation or any subsidiary of the Corporation, unless
such person agrees with the Corporation to make an offer, in either such case to
each holder of outstanding shares of Series B Convertible Preferred Stock to
purchase for cash at the time of purchase in such Tender Offer the same
percentage of shares of Series A Convertible Preferred Stock held by such holder
as the percentage of outstanding shares of Common Stock offered to be purchased
in such Tender Offer at a price per share of Series A Convertible Preferred
Stock equal to the greater of (i) the sum of (a) the sum of (1) the Conversion
Value, (2) an amount equal to the accrued but unpaid dividends on such share of
Series A Convertible Preferred Stock, and (3) an amount equal to the accrued and
unpaid interest on dividends in arrears (determined as provided in Section 5)
through the date of purchase pursuant to this Section 5(d) plus (b) an amount
----
equal to the product obtained by multiplying (x) the sum stated in the
immediately preceding clause (a) times (y) the quotient (expressed as a
-----
percentage) obtained by dividing (A) the amount determined by subtracting from
100 percent the Conversion Percentage in effect on the date of purchase pursuant
to this Section 5(d) by (B) the Conversion Percentage in effect on the date of
--
purchase pursuant to this Section 5(d) and (ii) an amount equal to the product
obtained by multiplying (x) the number of shares of Common Stock which would,
but for the purchase pursuant to this Section 5(d), be issuable on conversion in
accordance with Section 10(a) of one share of Series A Convertible Preferred
Stock and any accrued and unpaid dividends thereon and any accrued and unpaid
interest on dividends thereon in arrears if a Conversion Notice were given by
the holder of such share of Series A Convertible Preferred Stock on the date of
purchase pursuant to this Section 5(d) (determined without regard to any
limitation on conversion contained in Section 10(a)) times (y) the price per
-----
share of Common Stock offered in such Tender Offer.
SECTION 6. LIQUIDATION PREFERENCE. In the event of a liquidation,
-----------------------
dissolution, or winding up of the Corporation, whether voluntary or involuntary,
the holders of Series A Convertible Preferred Stock shall be entitled to receive
out of the assets Of the Corporation, whether such assets constitute stated
capital or surplus of any nature, an amount per share of Series A Convertible
Preferred Stock equal to the Liquidation Preference, and no more, before any
payment shall be made or any assets distributed to the holders of Junior
Liquidation Stock; provided, however, that such rights shall accrue to the
-------- -------
holders of Series A Convertible Preferred Stock only in the event that the
Corporation's payments with respect to the liquidation preference of the holders
of Senior Liquidation Stock are fully met. After the liquidation preferences of
the Senior Liquidation Stock are fully met, the entire assets of the Corporation
available for distribution shall be distributed ratably among (the holders of
the Series A Convertible Preferred Stock and any Parity Liquidation Stock in
proportion to the respective preferential amounts to which each is entitled (but
only to the extent of such preferential amounts). After payment in full of the
liquidation price of the shares of the Series A Convertible Preferred Stock and
the Parity Liquidation Stock, the holders of such shares shall not be entitled
to any further participation in any distribution of assets by the Corporation.
Neither a consolidation or merger of the Corporation with another corporation
nor a sale or transfer of all or part of the Corporation's assets for cash,
securities, or other property in and of itself will be considered a liquidation,
dissolution, or winding up of the Corporation.
15
<PAGE>
SECTION 7. MANDATORY REDEMPTION BASED ON MAXIMUM SHARE AMOUNT. (1) If
-----------------------------------------------------
rules of the Nasdaq SmallCap Market ("Nasdaq") relating to stockholder approval
of certain matters which rules, at the date of filing this Certificate of
Designations, are proposed to be adopted by the Nasdaq, are adopted by the
Nasdaq and are applicable in conversion of shares of Series A Convertible
Preferred Stock so as to limit the number of shares of Common Stock which the
Corporation may issue upon conversion of shares of Series A Convertible
Preferred Stock and payment of dividends on shares of Series A Convertible
Preferred Stock, then the provisions of this Section 7 shall be applicable.
Notwithstanding any other provision herein, unless the Stockholder Approval
shall have been obtained from the stockholders of the Corporation or waived by
the Nasdaq, the Corporation shall not be required to issue upon conversion of
shares of Series A Convertible Preferred Stock pursuant to Section 10 more than
the Maximum Share Amount, less the aggregate number of shares of Common Stock
issued by the Corporation pursuant to Section 5 as dividends on the Series A
Convertible Preferred Stock. The Maximum Share Amount shall be allocated among
the shares of Series A Convertible Preferred Stock at the time of initial
issuance thereof pro rata based on the total number of authorized shares of
Series A Convertible Preferred Stock provided in Section 2. Each certificate for
shares of Series A Convertible Preferred Stock initially issued shall bear a
notation as to the number of shares constituting the portion of the Maximum
Share Amount allocated to the shares of Series A Convertible Preferred Stock
represented by such certificate for purposes of conversion thereof. The
Corporation shall maintain records which show the number of shares of Common
Stock issued by the Corporation pursuant to Section 5 as dividends on the shares
of Series A Convertible Preferred Stock represented by each certificate, which
records shall be controlling to the absence of manifest error. Upon surrender of
any certificate for shares of Series A Convertible Preferred Stock for transfer
or re-registration thereof (or, at the option of the holder, for conversion
pursuant to Section 10(a) of less than all of the shares of Series A Convertible
Preferred Stock represented thereby), the Corporation shall make a notation on
the new certificate issued upon such transfer or re-registration or evidencing
such unconverted shares, as the case may be, as to the remaining number of
shares of Common Stock from the Maximum Share Amount remaining available for
conversion of the shares of Series A Convertible Preferred Stock evidenced by
such new certificate (including, without limitation, by taking into account the
number of shares of Common Stock issued by the Corporation pursuant to Section 5
as a dividend on the shares of Series A Convertible Preferred Stock represented
by the certificate so surrendered and not previously reflected on the
certificate so surrendered, as shown on the records maintained by the
Corporation). If any certificate for shares of Series A Convertible Preferred
Stock is surrendered for split-up into two or more certificates representing an
aggregate number of shares of Series A Convertible Preferred Stock equal to the
number of shares of Series A Convertible Preferred Stock represented by the
certificate so surrendered (as reduced by any contemporaneous conversion of
shares of Series A Convertible Preferred Stock represented by the certificate so
surrendered), each certificate issued on such split-up shall bear a notation of
the portion of the Maximum Share Amount allocated thereto determined by pro rata
allocation from among the remaining portion of the Maximum Share Amount
allocated to the certificate so surrendered. If any shares of Series A
Convertible Preferred Stock represented by a single certificate are converted in
full pursuant to Section 10, all of the portion of the Maximum Share Amount
allocated to such shares of Series A Convertible Preferred Stock which remains
unissued after such conversion shall be re-allocated pro rata to the outstanding
shares of Series A Convertible Preferred Stock held of record by the holder of
record at the close of business on the date of such conversion of the shares of
Series A Convertible Preferred Stock so converted, and if there shall be no
other shares of Series A Convertible Preferred Stock held of record by such
holder at the close of business on such date, then such portion of the Maximum
Share Amount shall be allocated pro rata among the shares of Series A
Convertible Preferred Stock outstanding on such date.
16
<PAGE>
(2) The Corporation shall promptly, but in no event later than five
business days after the occurrence, give notice to each holder (by telephone
line facsimile transmission at such number as such holder has specified in
writing to the Corporation for such purposes or, if such holder shall not have
specified any such number, by overnight courier or first class mail, postage
prepaid, at such holder's address as the same appears on the stock books of the
Corporation) and any holder may at any time after the occurrence give notice to
the Corporation, in either case if on any ten trading days within any period of
20 consecutive trading days the Corporation would not have been required to
convert shares of Series A Convertible Preferred Stock of such holder in
accordance with Section 10(a) as a consequence of the limitations set forth in
Section 7(a)(1) had all outstanding shares of Series A Convertible Preferred
Stock held by such holder been converted into Common Stock on each such day
determined without regard to the limitation, if any, on such holder contained in
the proviso to the second sentence of Section 10(a) (any such notice, whether
given by the Corporation or a holder, an "Inconvertibility Notice"). If the
Corporation shall have given or been required to give any Inconvertibility
Notice, or if a holder shall have given any Inconvertibility Notice, then within
ten business days after such Inconvertibility Notice is given or was required to
be given, the holder receiving or giving, as the case may be, the
Inconvertibility Notice shall have the right by written notice to the
Corporation (which written notice may be contained in the Inconvertibility
Notice given by the holder) to direct the Corporation to redeem the portion of
such holder's outstanding shares of Series A Convertible Preferred Stock (which,
if applicable, shall be all of such holder's outstanding shares of Series A
Convertible Preferred Stock) as shall not, on the business day prior to the date
of such redemption, be convertible into shares of Common Stock by reason of the
limitations set forth in Section 7(a)(1) (determined without regard to the
limitation, if any, on such holder contained in the proviso to the second
sentence of Section 10(a)), within ten business days after such holder so
directs the Corporation, at a price per share equal to the Share Limitation
Redemption Price. If a holder directs the Corporation to redeem outstanding
shares of Series A Convertible Preferred Stock and, prior to the date the
Corporation is required to redeem such shares of Series A Convertible Preferred
Stock, the Corporation would have been able, within the limitations set forth in
Section 7(a)(1), to convert all of such holder's outstanding shares of Series A
Convertible Preferred Stock (determined without regard to the limitation, if
any, on such holder contained in the proviso to the second sentence, of Section
10(a)) on any ten trading days within any period of 20 consecutive trading days
commencing after the period of 20 consecutive trading days which gave rise to
the applicable Inconvertibility Notice from the Corporation or such holder of
shares of Series A Convertible Preferred Stock, as the case may be, had all of
such holder's outstanding shares of Series A Convertible Preferred Stock been
surrendered for conversion into Common Stock on each of such ten trading days
within such 20 trading days period, then the Corporation shall not be required
to redeem any shares of Series A Convertible Preferred Stock by reason of such
Inconvertibility Notice.
17
<PAGE>
(3) Notwithstanding the giving of any notice by the Corporation to the
holders of Series A Convertible Preferred Stock pursuant to Section 7(a)(2) or
the giving or the absence of any notice by the holders of the Series A
Convertible Preferred Stock in response thereto or any redemption of shares of
Series A Convertible Preferred Stock pursuant to Section 7(a)(2), thereafter the
provisions of Section 7(a)(2) shall continue to be applicable on any occasion
unless the Stockholder Approval shall have been obtained from the stockholders
of the Corporation or waived by the Nasdaq.
(4) On each Share Limitation Redemption Date, the Corporation shall
make payment in immediately available funds of the applicable Share Limitation
Redemption Price to such holder of shares of Series A Convertible Preferred
Stock to be redeemed to or upon the order of such holder as specified by such
holder in writing to the Corporation at least one business day prior to such
Share Limitation Redemption Date. If the Corporation is required to redeem all
or any portion of a holder's outstanding shares of Series A Convertible
Preferred Stock pursuant to this Section 7(a), the Corporation shall make
payment to such holder of the shares of Series A Convertible Preferred Stock to
be redeemed in respect of each share of Series A Convertible Preferred Stock to
be redeemed of an amount equal to the Share Limitation Redemption Price. Upon
redemption of less than all of the shares of Series A Convertible Preferred
Stock evidenced by a particular certificate, promptly, but in no event later
than three business days after surrender of such certificate to the Corporation,
the Corporation shall issue a replacement certificate for the shares of Series A
Convertible Preferred Stock evidenced by such certificate which have not been
redeemed. Only whole shares of Series A Convertible Preferred Stock may be
redeemed.
SECTION 8. NO SINKING FUND. The shares of Series A Convertible Preferred
---------------
Stock shall not be subject to the operation of a purchase, retirement, or
sinking fund.
SECTION 9. REDEMPTION BASED ON FLOOR PRICE AMOUNT. (1) Except as
-------------------------------------------
required by Section 10(a)(iv), the Corporation shall not be required to issue
upon conversion of shares of Series A Convertible Preferred Stock pursuant to
Section 10 more than the Floor Price Amount. Upon receiving a Conversion
Notice, the Corporation shall promptly determine whether the Conversion Price is
less than the Floor Price. If the Conversion Price is less than the Floor
Price, the Corporation shall have the right, exercisable by written notice to
the holders of record of the shares of Series A Convertible Preferred Stock who
delivered such Conversion Notice ("Converting Holders"), to redeem any shares
("Excess Shares") of Series A Convertible Preferred Stock as to which the
Converting Holders delivered a Conversion Notice which are in excess of the
Floor Price Shares. If the Corporation does not exercise its right to
redemption as to all of the Excess Shares, it shall deliver a Conversion
Deferral Notice to each Converting Holder pursuant to Section 10(a)(iii). Any
Redemption Notice under this Section shall be delivered to the Converting
Holders at their addresses appearing on the records of the Corporation within
one Business Day after receipt of the applicable Conversion Notice and shall
specify a date for completing the redemption (the "Redemption Date") within
three Business Days after receipt of the Conversion Notice; provided, however,
-------- -------
that any failure or defect in the giving of notice to any such holder shall not
affect the validity of notice to or the redemption of shares of Series A
Convertible Preferred Stock of any other holder.
18
<PAGE>
(2) On the Redemption Date and after receipt by the Corporation of
certificates for shares of Series A Preferred Stock to be redeemed pursuant to
this Section 9, the Corporation shall make payment, in immediately available
funds, of the applicable Redemption Price to each holder of Excess Shares to be
redeemed to or upon the order of such holder as specified by such holder in
writing to the Corporation at least one business day prior to the Redemption
Date. Upon redemption of less than all of the shares of Series A Convertible
Preferred Stock evidenced by a particular certificate, promptly, but in no event
later than three business days after surrender of such certificate to the
Corporation, the Corporation shall issue and deliver to the holder of record of
the surrendered certificate (or such holder's assignee) a replacement
certificate for the shares of Series A Convertible Preferred Stock which have
not been redeemed. Only whole shares of Series A Convertible Preferred Stock
may be redeemed. If the Corporation exercises its right to redeem less than all
Excess Shares of Series A Convertible Preferred Stock, then such redemption
shall be made, as nearly as practical pro rata among the Converting Holders.
SECTION 10. CONVERSION.
----------
(A) CONVERSION AT OPTION OF HOLDER. (i) Subject to the limitation set
-------------------------------
forth in Section 9, the limitations set forth in the legends to appear on the
certificates for the share of Series A Preferred Stock as provided in Section
10(a)(ii), and the provisions of Section 10(a)(iii) regarding conversion of
Excess Shares, the holders of the Series A Convertible Preferred Stock may
convert any or all of their shares of Series A Convertible Preferred Stock into
fully paid and nonassessable shares of Common Stock and such other securities
and property as hereinafter provided. Subject to the limitations referred to in
the preceding sentence, each share of Series A Convertible Preferred Stock may
be converted at the office of the Conversion Agent or at such other additional
office or offices, if any, as the Board of Directors may designate, initially
into such number of fully paid and nonassessable shares of Common Stock
(calculated as to each conversion to the nearest 1/100th of a share) determined
by dividing (x) the sum of (i) the Conversion Value, (ii) accrued but unpaid
dividends to the applicable Conversion Date on the share of Series A Convertible
Preferred Stock being converted, and (iii) accrued but unpaid interest on the
dividends on the share of Series A Convertible Preferred Stock being converted
in arrears to the applicable Conversion Date at the rate provided in Section 5
(such sum, the "Conversion Amount") by (y) the product of (I) the Conversion
Percentage with respect to the applicable Conversion Date times (II) the
-----
arithmetic average of the Market Price of the Common Stock for the Measurement
Period with respect to the applicable Conversion Date; provided, however, that
-------- -------
in no event shall the amount determined in accordance with this clause be
greater than $5.50 nor less than $4.00 U.S. per share of Common Stock (the
"Floor Price") (subject to equitable adjustments for stock splits, stock
dividends, combinations, recapitalizations, reclassifications and similar events
occurring on or after the date of filing of this Certificate of Designations
with the Secretary of State of the State of Delaware), in each case subject to
adjustment as hereinafter provided (the "Conversion Rate"); provided further,
----------------
however, that in no event shall any holder of shares of Series A Convertible
- -------
Preferred Stock be entitled to convert any shares of Series A Convertible
Preferred Stock in excess of that number of shares of Series A Convertible
Preferred Stock upon conversion of which the sum of (1) the number of shares of
Common Stock beneficially owned by such holder and any person whose beneficial
ownership of Common Stock would be aggregated with such holders beneficial
ownership of shares of Common Stock for purposes of Section 13(d) of the
Exchange Act, and Regulation 13D-G thereunder (each a "Restricted Person" and
collectively, the "Restricted Persons") (other than shares of Common Stock
deemed beneficially owned through the ownership of unconverted shares of Series
A Convertible Preferred Stock) and (2) the number of shares of Common Stock
issuable upon the conversion of the number of shares of Series A Convertible
Preferred Stock with respect to which the determination in this provisio is
being made, would result in beneficial ownership by such holder and all
Restricted Persons of such holder of more than 4.9% of the outstanding shares of
Common Stock. For purposes of the proviso to the immediately preceding sentence,
beneficial ownership shall be determined in accordance with Section 13(d) of the
Exchange Act and Regulation 13D-G thereunder, except as otherwise provided in
clause (1) of the proviso to the immediately preceding sentence.
19
<PAGE>
(ii) (A) 15% of the certificates for shares of Series A Convertible
Preferred Stock shall, until such time as such legend, by its terms, no longer
applies, contain the following legend:
"THESE SECURITIES ARE NOT CONVERTIBLE AT THE OPTION OF THE HOLDER HEREOF UNTIL
ON OR AFTER THE 90TH DAY FOLLOWING THE ORIGINAL ISSUANCE THEREOF."
(B) 25% of the certificates for shares of Series A Convertible
Preferred Stock shall, until such time as such legend, by its terms, no longer
applies, contain the following legend:
"THESE SECURITIES ARE NOT CONVERTIBLE AT THE OPTION OF THE HOLDER HEREOF UNTIL
ON OR AFTER THE 135TH DAY FOLLOWING THE ORIGINAL ISSUANCE THEREOF."
(C) 30% of the certificates for shares of Series A Convertible
Preferred Stock shall, until such time as such legend, by its terms, no longer
applies, contain the following legend:
"THESE SECURITIES ARE NOT CONVERTIBLE AT THE OPTION OF THE HOLDER HEREOF UNTIL
ON OR AFTER THE 180TH DAY FOLLOWING THE ORIGINAL ISSUANCE THEREOF."
(D) 30% of the certificates for shares of Series A Convertible
Preferred Stock shall, until such time as such legend, by its terms, no longer
applies, contain the following legend:
"THESE SECURITIES ARE NOT CONVERTIBLE AT THE OPTION OF THE HOLDER HEREOF UNTIL
ON OR AFTER THE 240TH DAY FOLLOWING THE ORIGINAL ISSUANCE THEREOF."
20
<PAGE>
Any new certificate issued upon transfer of any shares of Series A Convertible
Preferred Stock or, in connection with a conversion of shares of Series A
Convertible Preferred Stock, to evidence the unconverted balance of shares of
Series A Convertible Preferred Stock shall bear the same legend as the
certificate surrendered to the Corporation in connection herewith, if
applicable.
(iii) If the Corporation does not exercise its right to redeem all
Excess Shares pursuant to Section 9, the Corporation shall, during the First
Conversion Period, the Second Conversion Period and the Third Conversion Period,
have the right to defer conversion of such Excess Shares by delivering to the
Converting Holders, with a copy to the Transfer Agent, a Conversion Deferral
Notice within one Business Day after receipt of the Conversion Notice to which
such Conversion Deferral Notice relates. Any Conversion Deferral Notice shall be
delivered to the Converting Holders at their addresses appearing on the records
of the Corporation. If the Corporation elects to defer conversion of Excess
Shares instead of redeeming them, the Conversion Value for each unredeemed
Excess Share shall be multiplied by 105%; provided, however, that the Conversion
-------- -------
Value for each Excess Share may be adjusted pursuant to this Section 10(a)(iii)
only once during each of the First Conversion Period, the Second Conversion
Period, and the Third Conversion Period, although the Conversion Value for any
Excess Share may be adjusted pursuant to this Section 10(a)(iii) during
successive conversion periods. Each certificate for shares of Series A
Convertible Preferred Stock shall, until such time as such legend no longer
applies. contain the following legend:
"THE CONVERSION VALUE OF THESE SECURITIES IS SUBJECT TO ADJUSTMENT AS PROVIDED
IN SECTION 10(a)(iii) OF THE CERTIRCATE OF DESIGNATIONS."
(iv) The Corporation shall have no right to defer conversion of any
Excess Shares during the Fourth Conversion Period. If the Corporation receives a
Conversion Notice during the fourth Conversion Period, and does not deliver a
Redemption Notice to the Converting Holders in accordance with Section 9, then
the Converting Holders shall have the right to proceed with the conversion
described in the Conversion Notice notwithstanding the limitation set forth in
Section 9.
(B) OTHER PROVISIONS. (1) Notwithstanding anything in this Section
-----------------
10(b) to the contrary, no change in the Conversion Amount pursuant to Section
10(b) shall actually be made until the cumulative effect of the adjustments
called for by this Section 10(b) since the date of the last change in the
Conversion Amount would change the Conversion Amount by more than 1%. However,
once the cumulative effect would result in such a change, then the Conversion
Rate shall actually be changed to reflect all adjustments called for by this
Section 10(b) and not previously made. Notwithstanding anything in this Section
10(b), no change in the Conversion Amount shall be made that would result in a
Conversion Price of less than the par value of the Common Stock into which
shares of Series A Convertible Preferred Stock are at the time convertible.
21
<PAGE>
(2) The holders of shares of Series A Convertible Preferred Stock at
the close of business on the record date for any dividend payment to holders of
Series A Convertible Preferred Stock shall be entitled to receive the dividend
payable on such shares on the corresponding dividend payment date
notwithstanding the conversion thereof after such dividend payment record date
or the Corporation's default in payment of the dividend due on such payment
date; provided, however, that the holder of shares of Series A Convertible
-------- -------
Preferred Stock surrendered for conversion during the period between the close
of business on any record date for a dividend payment and the opening of
business on the corresponding dividend payment date must pay to the Corporation,
within five days after receipt by such holder, an amount equal to the dividend
payable on such shares on such dividend payment date if such dividend is paid by
the Corporation to such holder. A holder of shares of Series A Convertible
Preferred Stock on a record date for a dividend payment who (or whose
transferee) tenders any of such share for conversion into shares of Common Stock
on or after such dividend payment date will receive the dividend payable by the
Corporation on such shares of Series A Convertible Preferred Stock on such date,
and the converting holder need not make any payment of the amount of such
dividend in connection with such conversion of shares of Series A Convertible
Preferred Stock. Except as provided above, no adjustment shall be made in
respect of cash dividends on Common Stock or Series A Convertible Preferred
Stock that may be accrued and unpaid at the date of surrender of shares of
Series A Convertible Preferred Stock.
(3) (A) The right of the holders of Series A Convertible Preferred
Stock to convert their shares shall be exercised by delivering (which may be
done by telephone line facsimile transmission) a Conversion Notice to the
Conversion Agent, as provided above. If a holder of Series A Convertible
Preferred Stock elects to convert any shares of Series A Convertible Preferred
Stock in accordance with Section 10(a), such holder shall not be required to
physically surrender the certificate(s) representing such shares of Series A
Convertible Preferred Stock to the Corporation unless all of the shares of
Series A Convertible Preferred Stock represented thereby are so converted. Each
holder of shares of Series A Convertible Preferred Stock and the Corporation
shall maintain records showing the number of shares so converted and the dates
of such conversions or shall use such other method, satisfactory to such holder
and the Corporation, so as to not require physical surrender of such
certificates upon each such conversion. In the event of any dispute or
discrepancy, such records of the Corporation shall be controlling and
determinative in the absence of manifest error. Notwithstanding the foregoing,
if any shares of Series A Convertible Preferred Stock evidenced by a particular
certificate therefor are converted as aforesaid, the holder of Series A
Convertible Preferred Stock may not transfer the certificate(s) representing
such shares of Series A Convertible Preferred Stock unless such holder first
physically surrenders such certificate(s) to the Corporation, whereupon the
Corporation will forthwith issue and deliver upon the order of such holder of
shares of Series A Convertible Preferred Stock new certificate(s) of like tenor,
registered as such holder of shares of Series A Convertible Preferred Stock
(upon payment by such holder of shares of Series A Convertible Preferred Stock
of any applicable transfer taxes) may request, representing in the aggregate the
remaining number of shares of Series A Convertible Preferred Stock represented
by such certificate(s). Each holder of shares of Series A Convertible Preferred
Stock, by acceptance of a certificate for such shares, acknowledges and agrees
that (1) by reason of the provisions of this paragraph, following conversion of
any shares of Series A Convertible Preferred Stock represented by such
certificate, the number of shares of Series A Convertible Preferred Stock
represented by such certificate may be less than the number of shares stated on
such certificate and by reason of Section 7(a), the number of shares of Common
Stock from the Maximum Share Amount allocated to the shares of Series A
Convertible Preferred Stock represented by such certificate for purposes of
conversion of such shares may be less than the number thereof stated on such
certificate and (2) the Corporation may place a legend on the certificates for
shares of Series A Convertible Preferred Stock which refers to or describes the
provisions of this paragraph.
22
<PAGE>
(B) The Corporation shall pay any transfer tax arising in connection
with any conversion of shares of Series A Convertible Preferred Stock except
that the Corporation shall not however, be required to pay any tax which may be
payable in respect of any transfer involved in the issue and delivery upon
conversion of shares of Common Stock or other securities or property in a name
other than that of the holder of the shares of the Series A Convertible
Preferred Stock being converted and the Corporation shall not be required to
issue or deliver any such shares or other securities or property unless and
until the person or persons requesting the issuance thereof shall have paid to
the Corporation the amount of any such tax or shall have established to the
satisfaction of the Corporation that such tax has been paid. The number of
shares of Common Stock to be issued upon each conversion of shares of Series C
Convertible Preferred Stock shall be the number set forth in the applicable
Conversion Notice which number shall be conclusive absent manifest error. The
Corporation shall notify a holder who has given a Conversion Notice of any claim
of manifest error within one business day after such holder gives such
Conversion Notice and no such claim of error shall limit of delay performance of
the Corporation's obligation to issue upon such conversion the number of share
of Common Stock which are not in dispute. A Conversion Notice shall be deemed
for all purposes to be in proper form unless the Corporation notifies a holder
of shares of Series A Convertible Preferred Stock being converted within one
business day after a Conversion Notice has been given (which notice shall
specify all defects in the Conversion Notice) and any Conversion Notice
containing any such defect shall nonetheless be effective on the date given if
the converting holder promptly corrects all such defects.
(4) The Corporation (and any successor corporation) shall take all
action necessary so that a number of shares of the authorized but unissued
Common Stock (or common stock in the case of any successor corporation)
sufficient to provide for the conversion of the Series A Convertible Preferred
Stock outstanding upon the basis herein before provided are at all times
reserved by the Corporation (or any successor corporation), free from preemptive
rights, for such conversion, subject to the provisions of the next succeeding
paragraph. If the Corporation shall issue any securities or make any change in
its capital structure which would change the number of shares of Common Stock
into which each share of the Series A Convertible Preferred Stock shall be
convertible as herein provided, the Corporation shall at the same time also make
proper provision so that thereafter there shall be a sufficient number of shares
of Common Stock authorized and reserved, free from preemptive rights, for
conversion of the outstanding Series A Convertible Preferred Stock on the new
basis. If at any time the number of authorized but unissued shares of Common
Stock shall not be sufficient to effect the conversion of all of the outstanding
shares of Series A Convertible Preferred Stock, the Corporation promptly shall
seek such corporate action as may, in the opinion of its counsel, be necessary
to increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purpose.
23
<PAGE>
(5) In case of any consolidation or merger of the Corporation with any
other corporation (other than a wholly-owned subsidiary of the Corporation) in
which the Corporation is not the surviving corporation, or in case of any sale
or transfer of all or substantially all of the assets of the Corporation, or in
the case of any share exchange pursuant to which all of the outstanding shares
of Common Stock are converted into other securities or property, the Corporation
shall make appropriate provision or cause appropriate provision to be made so
that each holder of shares of Series A Convertible Preferred Stock then
outstanding shall have the right thereafter to convert such shares of Series A
Convertible Preferred Stock into the kind of shares of stock and other
securities and property receivable upon such consolidation, merger, sale,
transfer, or share exchange by a holder of shares of Common Stock into which
such shares of Series A Convertible Preferred Stock could have been converted
immediately prior to the effective date of such consolidation, merger, sale,
transfer, or share exchange and on a basis which preserves the economic benefits
of the conversion rights of the holders of shares of Series A Convertible
Preferred Stock on a basis as nearly as practical as such rights exist hereunder
prior thereto. If, in connection with any such consolidation, merger, sale,
transfer, or share exchange, each holder of shares of Common Stock is entitled
to elect to receive securities, cash, or other assets upon completion of such
transaction, the Corporation shall provide or cause to be provided to each
holder of Series A Convertible Preferred Stock the right to elect the
securities, cash, or other assets into which the Series A Convertible Preferred
Stock held by such holder shall be convertible after completion of any such
transaction on the some terms and subject to the same conditions applicable to
holders of the Common Stock (including, without limitation, notice of the right
to elect, limitations on the period in which such election shall be made, and
the effect of failing to exercise the election). The Corporation shall not
effect any such transaction unless the provisions of this paragraph have been
complied with. The above provisions shall similarly apply to successive
consolidations, mergers, sales, transfers, or share exchanges.
(6) If a holder shall have given a Conversion Notice for shares of
Series A convertible Preferred Stock and the Corporation shall not have given a
Redemption Notice pursuant to Section 9(a) or a Conversion Deferral Notice
pursuant to Section 10(a)(iii), the Corporation shall issue and deliver to such
person certificates for the Common Stock issuable upon such conversion within
three business days after such Conversion Notice is given and the person
converting shall be deemed to be the holder of record of the Common Stock
issuable upon such conversion, and all rights with respect to the shares
surrendered shall forthwith terminate except the right to receive the Common
Stock or other securities, cash, or other assets as herein provided. If a holder
shall have given a Conversion Notice as provided herein, the Corporation's
obligation to issue and deliver the certificates for Common Stock shall be
absolute and unconditional, irrespective of any action or inaction by the
converting holder to enforce the same, any waiver or consent with respect to any
provision thereof, the recovery of any judgment against any person or any action
to enforce the same, any failure or delay in the enforcement of any other
obligation of the Corporation to the holder of record, or any setoff,
counterclaim, recoupment, limitation or termination, or any breach or alleged
breach by the holder of any obligation to the Corporation, and irrespective of
any other circumstance which might otherwise limit such obligation of the
Corporation to the holder in connection with such conversion. If the Corporation
fails to issue and deliver the certificates for the Common Stock to the holder
converting shares of Series A Convertible Preferred Stock pursuant to the first
sentence of this paragraph as and when required to do so, in addition to any
other liabilities the Corporation may have hereunder and under applicable law
(1) the Corporation shall pay or reimburse such holder on demand for all
24
<PAGE>
out-of-pocket expenses including, without limitation, reasonable fees and
expenses of legal counsel incurred by such holder as a result of such failure,
(2) the Conversion Percentage applicable to such conversion shall be reduced by
two-and-one-half percentage points from the Conversion Percentage otherwise
applicable to such conversion and (3) such holder may by written notice (which
may be given by mail, courier, personal service or telephone line facsimile
transmission) or oral notice (promptly confirmed in writing) given at any time
prior to delivery to such holder of the certificates for the shares of Common
Stock issuable upon such conversion of shares of Series A Convertible Preferred
Stock, rescind such conversion, whereupon such holder shall have the right to
convert such shares of Series A Convertible Preferred Stock thereafter in
accordance herewith.
(7) No fractional shares of Common Stock shall be issued upon
conversion of Series A Convertible Preferred Stock but, in lieu of any fraction
of a share of Common Stock to purchase fractional shares of Common Stock which
would otherwise be issuable in respect of the aggregate number of such shares
surrendered for conversion at one time by the same holder, the Corporation shall
pay in cash an amount equal to the product of (i) the arithmetic average of the
Market Price of a share of Common Stock on the three consecutive trading days
ending on the trading day immediately preceding the Conversion Date and (ii)
such fraction of a share.
(8) The Conversion Amount shall he adjusted from time to time under
certain circumstances, subject to the provisions of Section 10(b)(1) as follows:
(i) In case the Corporation shall issue rights or warrants on a pro
rata basis to all holders of the Common Stock entitling such holders to
subscribe for or purchase Common Stock on the record date referred to below at a
price per share less than the Current Market Price for such record date, then in
each such case the Conversion Amount in effect on such record due shall be
adjusted in accordance with the formula
C1 = C x O + N
--------
0 + N x P
--------
M
where
C1 = the adjusted Conversion Amount
C = the current Conversion Amount
O = the number of shares of Common Stock outstanding on the record
date.
N = the number of additional shares of Common Stock issuable
Pursuant to the exercise of such rights or warrants.
P = the offering price per share of the additional shares (which
amount shall include amounts received by the Corporation in
respect of the issuance and exercise of such rights or
warrants).
25
<PAGE>
M = the Current Market Price per share of Common Stock on the
record date.
Such adjustment shall become effective immediately after the record date for the
determination of stockholders entitled to receive such rights or warrants. If
any or all such rights or warrants are not so issued or expire or terminate
before being exercised, the Conversion Amount then in effect shall he readjusted
appropriately.
(ii) In case the Corporation shall, by dividend or otherwise,
distribute to all holders of its Junior Stock (as hereinafter defined) evidences
of its indebtedness or assets (including securities, but excluding any warrants
or subscription rights referred to in subparagraph (i) above and any dividend or
distribution paid in cash out of the retained earnings of the Corporation), then
in each such case the Conversion Amount then in effect shall be Adjusted in
accordance with the formula
C1 = C x M
---
M-F
where
C1 = the adjusted Conversion Amount
C = the current Conversion Amount
M = the Current Market Price per share of Common Stock on the
record date mentioned below.
F = the aggregate amount of such cash dividend and/or the
fair market value on the record date of the assets or
securities to be distributed divided by the number of shares of
Common Stock outstanding on the record date. The Board of
Directors shall determine such fair market value, which
determination shall be conclusive.
Such adjustment shall become effective immediately after the record date for the
determination of stockholders entitled to receive such dividend or distribution.
For purposes of this subparagraph (ii), "Junior Stock" shall include any class
of capital stock ranking junior as to dividends or upon liquidation to the
Series A Convertible Preferred Stock.
(iii) All calculations hereunder shall be made to the nearest cent or
to the nearest 1/100 of a share, as the case may be.
(iv) If at any time as a result of an adjustment made pursuant to
Section 10(b)(5), the holder of any Series A Convertible Preferred Stock,
thereafter surrendered for conversion shall become entitled to receive
securities, cash or assets other than Common Stock, the number or amount of such
securities or property so receivable upon conversion shall be subject to
adjustment from time to time in a manner and on terms nearly equivalent as
practicable to provisions with respect to the Common Stock contained in
subparagraphs (i) to (iii) above.
26
<PAGE>
(9) Except as otherwise provided above in this Section 10, no
adjustment in the Conversion Amount shall be made in respect of any conversion
for share distributions or dividends theretofore declared and paid or payable on
the Common Stock.
(10) Whenever the Conversion Amount is adjusted as herein provided, the
Corporation shall send to each holder and each transfer agent, if any, for the
Series A Convertible Preferred Stock and the Common Stock, a statement signed by
the Chairman of the Board, the President, or any Vice President of the
Corporation and by its Treasurer or its Secretary or an Assistant Secretary
stating the adjusted Conversion Amount determined as provided in this Section
10, and any adjustment so evidenced, given in good faith, shall be binding upon
all stockholders and upon the Corporation. Whenever the Conversion Amount is
adjusted, the Corporation will give notice by mail to the holders of record of
Series A Convertible Preferred Stock, which notice shall be made within 15 days
after the effective date of such adjustment and shall state the adjustment and
the Conversion Amount. Notwithstanding the foregoing notice provisions, failure
by the Corporation to give such notice or a defect in such notice shall not
affect the binding nature of such corporate action of the Corporation.
(11) Whenever the Corporation shall propose to take any of the actions
specified in Section 10(b)(5) or in subparagraphs (i) or (ii) of Section
10(b)(8) which would result in any adjustment in the Conversion Amount under
this Section 10(b), the Corporation shall cause a notice to be mailed at least
20 days prior to the date on which the books of the Corporation will close or on
which a record will be taken for such action, to the holders of record of the
outstanding Series A Convertible Preferred Stock on the date of such notice.
Such notice shall specify the action proposed to be taken by the Corporation and
the date as of which holders of record of the Common Stock shall participate in
any such actions or be entitled to exchange their Common Stock for securities or
other property as the case may be. Failure by the Corporation to mail the
notice or any defect in such notice shall not affect the validity of the
transaction.
(C) MANDATORY CONVERSION. There shall be no mandatory conversion of
---------------------
Series A Convertible Preferred Stock.
SECTION 11. REDEMPTION AT OPTION OF HOLDERS. The holders of shares of
----------------------------------
Series A Convertible Preferred Stock shall not be entitled to require the
Corporation to redeem any of such shares.
SECTION 12. VOTING RIGHTS. Except as otherwise required by law or
--------------
expressly provided herein, shares of Series A Convertible Preferred Stock shall
not be entitled to vote on any matter.
27
<PAGE>
The affirmative vote or consent of the holders of a majority of the
outstanding shares of the Series A Convertible Preferred Stock, voting
separately as a class, will be required for (1) any amendment, alteration, or
repeal, whether by merger or consolidation or otherwise, of the Corporation's
Restated Certificate of Incorporation if the amendment, alteration, or repeal
materially and adversely affects the powers, preferences, or special rights of
the Series A Convertible Preferred Stock, or (2) the creation and issuance of
any Senior Dividend Stock or Senior Liquidation Stock; provided, however, that
-------- -------
any increase in the authorized Preferred Stock of the Corporation or the
creation and issuance of any stock which is both Junior Dividend Stock of the
Corporation or the creation and issuance of any stock which is both Junior
Dividend Stock and Junior Liquidation Stock shall not be deemed to affect
materially and adversely such powers, preferences, or special rights and any
such increase or creation and issuance may be made without any such vote by the
holders of Series A Convertible Preferred Stock except as otherwise required by
law.
SECTION 13. OUTSTANDING SHARES. For purposes of this Certificate of
-------------------
Designations all shares of Series A Convertible Preferred Stock shall be deemed
outstanding except (i) from the date of surrender of certificates representing
shares of Series A Convertible Preferred Stock for conversion into Common Stock,
all shares of Series A Convertible Preferred Stock converted into Common Stock;
(ii) from the date of registration of transfer, all shares of Series A
Convertible Preferred Stock held of record by the Corporation or any subsidiary
or Affiliate (as defined herein) of the Corporation and (iii) from the Share
Limitation Redemption Date, Redemption Date or Optional Redemption Date all
shares of Series A Convertible Preferred Stock which are redeemed, so long as in
each case the Share Limitation Redemption Price, the Redemption Price or the
Optional Redemption Price, as the case may be, of such shares of Series A
Convertible Preferred Stock shall have been paid by the Corporation as and when
required hereby. For the purposes of this Certificate of Designations,
"Affiliate" means any person, other than the original holders of the shares of
Series A Convertible Preferred Stock, directly or indirectly controlling or
controlled by or under direct or indirect common control with the Corporation.
"Control" is the power to direct the management and policies of a person,
directly or through one or more intermediaries, whether through the ownership of
voting securities, by contract, or otherwise.
IN WITNESS WHEREOF, American Bingo & Gaming Corp., has caused this
certificate to be signed as of the 30th day of July, 1997.
AMERICAN BINGO & GAMING CORP.
Attest:
By: /s/ Greg Wilson
----------------
Chief Executive Officer
BY:
-------------------
28
<PAGE>
AMERICAN BINGO & GAMING CORP.
CERTIFICATE OF DESIGNATIONS OF
SERIES B PREFERRED STOCK
(Pursuant to Section 151 of the of the Delaware General Corporation Law)
American Bingo & Gaming Corp., a Delaware corporation (the "Corporation"),
in accordance with the provisions of Section 103 of the General Corporation Law
of the State of Delaware (the "DGCL") DOES HEREBY CERTIFY:
That pursuant to authority vested in the Board of Directors of the
Corporation (the "Board of Directors" or the "Board") by the Certificate of
Incorporation, as amended, of the Corporation, the Board of Directors, at a
meeting held August 4, 1998, adopted a resolution providing for the creation of
a series of the Corporation's Preferred Stock, $.01 par value, which series is
designated "Series B Preferred Stock", which resolution is as follows:
RESOLVED, that pursuant to authority vested in the Board of Directors by
the Certificate of Incorporation, as amended, the Board of Directors does hereby
provide for the creation of a series of the Preferred Stock, $.01 par value
(hereafter called the "Preferred Stock"), of the Corporation, and to the extent
that the voting powers and the designations, preferences and relative,
participating, optional or other special rights thereof and the qualifications,
limitations or restrictions of such rights have not been set forth in the
Certificate of Incorporation, as amended, of the Corporation, does hereby fix
the same as follows:
The rights, preferences, privileges, and limitations granted to and imposed
on the Series B Preferred Stock (the "Series B Preferred Stock"), which series
shall consist of 300,000 shares, are as set forth below. The following rights,
preferences, privileges, and limitations are subject to the designation,
description, and terms of one or more subsequent series of Preferred Stock by
the Board of Directors of American Bingo & Gaming Corp. (the "Corporation")
pursuant to authority granted by the Certificate of Incorporation. To the
extent that the rights, preferences, privileges, and limitations of any such
subsequent series conflict or are inconsistent with any of the rights,
preferences, privileges, and limitations of the Series B Preferred Stock, the
designation and description of terms of the subsequent series which is the
latest so designated shall control and prevail over the rights, preferences,
privileges, and limitations of the Series B Preferred Stock.
SECTION 1. SERIES B PREFERRED STOCK. There shall be a series of
Preferred Stock referred to "Series B Preferred Stock."
<PAGE>
SECTION 2. DESIGNATION, PAR VALUE AND AMOUNT. The shares of Series B
Preferred Stock shall be with par value of $0.01 per share, and the number of
shares constituting such series shall be 300,000; provided, however, that, if
more than a total of 300,000 shares of Series B Preferred Stock shall be
issuable upon the exercise of Rights (the "Rights") issued pursuant to the
Rights Agreement, dated as of August 4, 1998, between the Corporation and
American Stock Transfer Company, as Rights Agent, as amended from time to time
(the "Rights Agreement"), the Board of Directors of the Corporation, pursuant to
Section 151 of the Delaware General Corporation Law, shall direct by resolution
or resolutions that a Certificate of Designation be properly executed and filed
providing for the total number of shares of Series B Preferred Stock authorized
to be issued to be increased (to the extent that the Certificate of
Incorporation then permits) to the largest number of whole shares (rounded up to
the nearest whole number) issuable upon exercise of the Rights.
SECTION 3. VOTING RIGHTS. The holders of shares of Series B
Preferred Stock shall have the following voting rights:
(A) Except as required by applicable law, the holders of shares of
Series B Preferred Stock and the holders of shares of the Corporation's Common
Stock, $0.001 par value (the "Common Stock"), shall vote together as one class
on all matters submitted to a vote of shareholders of the Corporation.
(B) Each share of Series B Preferred Stock shall entitle the
holder thereof to 1000 votes on all matters submitted to a vote of the
shareholders of the Corporation.
(C) The Certificate of Incorporation of the Corporation shall not
be further amended in any manner which would materially alter or change the
powers, preferences or special rights of the Series B Preferred Stock so as to
affect them adversely without the affirmative vote of the holders of at least a
majority of the outstanding shares of Series B Preferred Stock, voting
separately as a class.
(D) Except as set forth herein (or as otherwise required by
applicable law), holders of Series B Preferred Stock shall have no general or
special voting rights and their consent shall not be required for taking any
corporate action.
SECTION 4. DIVIDENDS. The holders of Series B Preferred Stock shall
share ratably in any dividend or distribution declared by the Corporation on
shares of Common Stock in a ratio of 1000 to one with respect to a share of
Series B Preferred Stock and a share of Common Stock, respectively.
SECTION 5. LIQUIDATION, DISSOLUTION OR WINDING UP.
2
<PAGE>
(A) Subject to the prior and superior rights of holders of any
shares of any series of Preferred Stock ranking prior and superior to the shares
of Series B Preferred Stock with respect to rights upon liquidation, dissolution
or winding up (voluntary or otherwise), no distribution shall be made to the
holders of shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series B Preferred Stock unless
prior thereto the holders of shares of Series B Preferred Stock shall have
received $0.01 per share, plus an amount equal to accrued and unpaid dividends
and distributions thereon, if any, to the date of such payment (the "Series B
Liquidation Preference"). Following the payment of the full amount of the
Series B Liquidation Preference, no additional distributions shall be made to
the holders of shares of Series B Preferred Stock unless, prior thereto, the
holders of shares of Common Stock shall have received an amount per share (the
"Capital Adjustment") equal to the quotient obtained by dividing (i) the Series
B Liquidation Prefer-ence by (ii) 1000. Following the payment of the full
amount of the Series B Liquidation Preference and the Capital Adjustment in
respect of all outstanding shares of Series B Preferred Stock and Common Stock,
respectively, holders of Series B Preferred Stock and holders of Common Stock
shall receive a ratable and proportionate share of the remaining assets to be
distributed in the ratio of 1000 to one (1) with respect to Series B Preferred
Stock and Common Stock, on a per share basis, respectively.
(B) If there are not sufficient assets available to permit payment
in full of the Series B Liquidation Preference and the liquidation preferences
of all other series of preferred stock, if any, which rank on a parity with the
Series B Preferred Stock, then such remaining assets shall be distributed
ratably to the holders of Series B Preferred Stock and the holders of such
parity shares in proportion to their respective liquidation preferences. If
there are not sufficient assets available to permit payment in full of the
Capital Adjustment, then such remaining assets shall be distributed ratably to
the holders of Common Stock.
SECTION 6. CONSOLIDATION, MERGER, ETC. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case the shares of
Series B Preferred Stock shall at the same time be similarly exchanged or
changed in an amount per share equal to 1000 times the aggregate amount of
stock, securities, cash and/or any other property (payable in kind), as the case
may be, into which or for which each share of Common Stock is changed or
exchanged.
SECTION 7. NO REDEMPTION. The shares of Series B Preferred Stock
shall not be redeemable.
SECTION 8. RANKING. The Series B Preferred Stock shall rank junior
to the Series A Convertible Preferred Stock and to all other series of the
Corporation's Preferred Stock as to the payment of dividends and the
distribution of assets, unless the terms of any such series shall provide
otherwise.
SECTION 9. REACQUIRED SHARES. Any shares of Series B Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and canceled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
subject to the conditions and restrictions on issuance set forth herein, in the
Certificate of Incorporation, in any other Certificate of Designation creating a
series of Preferred Stock or as otherwise required by law.
3
<PAGE>
IN WITNESS WHEREOF, this Certificate of Designation is executed on behalf
of the Corporation by its Chief Executive Officer as of August 4, 1998.
/s/ Andre M. Hilliou
-----------------------
Andre M. Hilliou, Chairman and
Chief Executive Officer
4
<PAGE>
SUBSCRIPTION AGREEMENT
THIS SUBSCRIPTION AGREEMENT, dated as of July 31, 1997, by and between
AMERICAN BINGO & GAMING CORP. a Delaware corporation, with headquarters located
at 515 Congress Avenue, Suite 7200, Austin, Texas 75701 (the "Company"), and
_________________, an individual who resides in ______________________ (the
"Buyer").
W I T N E S S E T H:
--------------------
WHEREAS, the Buyer wishes to purchase, upon the terms and subject to the
conditions of this Agreement, shares of convertible preferred stock of the
Company which will be convertible into shares of Common Stock, $.001 par value
(the "Common Stock"), of the Company and in connection therewith the Company is
to issue to the Buyer a warrant to purchase shares of Common Stock as provided
in this Agreement; and
WHEREAS, the Company and the Buyer are executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
by Rule 506 of Regulation D as promulgated by the Securities and Exchange
Commission (the "SEC") under the Securities Act of 1933, as amended (the "1933
Act");
NOW THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. AGREEMENT TO SUBSCRIBE; PURCHASE PRICE.
(A) SUBSCRIPTION. The Buyer hereby agrees to purchase from the Company
the number of shares (the "Initial Preferred Shares") of Series A Convertible
Preferred Stock, $.01 par value (the "Preferred Stock"), of the Company set
forth on the signature page of this Agreement, having the terms and conditions
as set forth in the form of Certificate of Designations of the Series A
Convertible Preferred Stock attached hereto as Annex I (the "Certificate of
Designations") at the price per share and for the aggregate purchase price set
forth on the signature page of this Agreement. The purchase price for the
Initial Preferred Shares shall be payable in United States Dollars. In
connection with the purchase of the Initial Preferred Shares by the Buyer, the
Company shall issue to the Buyer at the closing on the Closing Date (as defined
herein) a warrant in the form attached hereto as Annex II (the "Warrant") to
purchase _____________ shares of Common Stock (subject to adjustment as provided
in the Warrant). The additional shares of Preferred Stock issuable pursuant to
Section 2(c) of the Registration Rights Agreement, the form of which is attached
hereto as Annex III (the "Registration Rights Agreement"), are referred to
herein as the "Additional Preferred Shares". The Initial Preferred Shares and
the Additional Preferred Shares are referred to herein collectively as the
"Preferred Shares." The shares of Common Stock issuable upon conversion of the
Preferred Shares are referred to herein as the "Conversion Shares." The shares
of Common Stock issuable pursuant to Section 5 of the Certificate of
Designations as a dividend on the Preferred Shares are referred to herein as the
"Dividend Shares". The shares of Common Stock issuable upon conversion of the
Warrant are referred to herein as the "Warrant Shares." The Common Shares, the
Dividend Shares and the Warrant Shares are referred to herein collectively as
the "Common Shares". The Common Shares and the Preferred Shares are referred to
herein collectively as the "Shares." The Shares and the Warrant are referred to
herein collectively as the "Securities."
<PAGE>
(B) FORM OF PAYMENT. The Buyer shall pay the purchase price for the
Initial Preferred Shares by delivering good funds in United States Dollars to
the escrow agent (the "Escrow Agent") identified in the Joint Escrow
Instructions attached hereto as Annex IV (the "Joint Escrow Instructions").
Such delivery of funds shall be made against delivery by the Company of the
certificates for the Initial Preferred Shares and the Warrant registered in the
name of the Buyer. Promptly following payment by the Buyer to the Escrow Agent
of the purchase price of the Initial Preferred Shares, but in any event prior to
the Closing Date, the Company shall deliver certificates for the Initial
Preferred Shares and the Warrant, registered in the name of the Buyer, to the
Escrow Agent. The certificates for the Initial Preferred Shares and the Warrant
shall be delivered by the Company to the Escrow Agent on a delivery against
payment basis at the closing. By signing this Agreement, the Buyer and the
Company each agrees to all of the terms and conditions of, and becomes a party
to, the Joint Escrow Instructions, all of the provisions of which are
incorporated herein by this reference as if set forth in full. As used in this
Agreement, the term "Business Day" means any day other than a Saturday, Sunday
or other day on which commercial banks in The City of New York are authorized or
required by law to remain closed.
(C) METHOD OF PAYMENT. Payment of the purchase price for the Preferred
Shares shall be made by wire transfer of funds to:
Citibank, N.A.
153 East 53rd Street
New York, New York 10043
ABA#021000089
For credit to A/C#_____________
For credit to the account of ___________________________
Reference: ___________/American Bingo
Not later than 4:00 p.m., New York City time, on the date which is two Business
Days after the Company shall have accepted this Agreement and returned a signed
counterpart of this Agreement to the Buyer or its legal counsel, the Buyer shall
deposit with the Escrow Agent the aggregate purchase price for the Initial
Preferred Shares.
2. BUYER REPRESENTATIONS, WARRANTIES, ETC.
The Buyer represents and warrants to, and covenants and agrees with, the
Company as follows:
(A) PURCHASE FOR INVESTMENT. The Buyer is purchasing the Preferred
Shares and acquiring the Warrant for its own account for investment only and not
with a view towards the public sale or distribution thereof;
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(B) ACCREDITED INVESTOR. The Buyer is an "accredited investor" as that
term is defined in Rule 501 of the General Rules and Regulations under the 1933
Act by reason of Rule 501(a)(3);
(C) REOFFERS AND RESALES. All subsequent offers and sales of the
Shares by the Buyer shall be made pursuant to registration of the Shares being
offered and sold under the 1933 Act or pursuant to an exemption from
registration;
(D) COMPANY RELIANCE. The Buyer understands that the Initial Preferred
Shares are being offered and sold, the Warrant is being issued, and the Common
Shares and the Additional Preferred Shares are being offered, to it in reliance
on specific exemptions from the registration requirements of United States
federal and state securities laws and that the Company is relying upon the truth
and accuracy of, and the Buyer's compliance with, the representations,
warranties, agreements, acknowledgments and understandings of the Buyer set
forth herein in order to determine the availability of such exemptions and the
eligibility of the Buyer to acquire the Initial Preferred Shares and the Warrant
and to receive an offer of the Common Shares and the Additional Preferred
Shares;
(E) INFORMATION PROVIDED. The Buyer and its advisors, if any, have
been furnished with all materials relating to the business, finances and
operations of the Company and materials relating to the offer and sale of the
Initial Preferred Shares and the issuance of the Warrant and the offer of the
Common Shares and the Additional Preferred Shares which have been requested by
the Buyer; the Buyer and its advisors, if any, have been afforded the
opportunity to ask questions of the Company and have received complete and
satisfactory answers to any such inquiries; without limiting the generality of
the foregoing, the Buyer has had the opportunity to obtain and to review the
Company's (1) Annual Report on Form 10-KSB for the fiscal year ended December
31, 1996 (the "1996 10-K"), (2) Quarterly Report on Form 10QSB for the fiscal
quarter ended March 31, 1997 (the "March 31 10-Q), (3) Current Report on Form
8-K dated March 18, 1997 and (4) proxy statement for the Company's 1996 Annual
Meeting, in each case as filed with the SEC (collectively, the "SEC Reports")
and a draft of the Quarterly Report on Form 1O-QSB for the fiscal quarter ended
June 30, 1997, and the Buyer understands that its investment in the Shares
involves a high degree of risk;
(F) ABSENCE OF APPROVALS. The Buyer understands that no United States
federal or state agency or any other government or governmental agency has
passed on or made any recommendation or endorsement of the Shares; and
(G) SUBSCRIPTION AGREEMENT. This Agreement has been duly and validly
authorized, executed and delivered on behalf of the Buyer and is a valid and
binding agreement of the Buyer enforceable in accordance with its terms, subject
as to enforceability to general principles of equity and to bankruptcy,
insolvency, moratorium and other similar laws affecting the enforcement of
creditors' rights generally.
3. COMPANY REPRESENTATIONS, WARRANTIES, ETC.
The Company represents and warrants to, and covenants and agrees with, the
Buyer that:
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(A) ORGANIZATION AND AUTHORITY. The Company and each of its
subsidiaries listed in Exhibit 21.1 to the 1996 10-K (the "Subsidiaries") is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware, and has all requisite corporate power and authority to
(i) own, lease and operate its properties and to carry on its business as now
being conducted. and (ii) to execute, deliver and perform its obligations under
this Agreement, the Certificate of Designations, the Warrant, the Registration
Rights Agreement, the Transfer Agent Agreement, the form of which is attached
hereto as Annex IV (the "Transfer Agent Instructions"), and the other agreements
to be executed and delivered by the Company in connection herewith, and to
consummate the transactions contemplated hereby and thereby. The Company and
each of its Subsidiaries is duly qualified to do business as a foreign
corporation and is in good standing in all jurisdictions wherein such
qualification is necessary and where failure so to qualify could have a material
adverse effect on the business, properties, operations, condition (financial or
other), results of operations or prospects of the Company and its Subsidiaries,
taken as a whole. The Company has no equity investment in any person other than
the Subsidiaries.
(B) CAPITALIZATION. The authorized capital stock of the Company
currently consists of (a) 20,000,000 shares of Common Stock of which 4,345,919
shares were outstanding as of July 11, 1997, all of which are fully paid and
nonassessable; and (b) 1,000,000 shares of Preferred Stock, S.001 par value,
none of which are outstanding, and 3,000 shares of which will be designated as
Series A Convertible Preferred Stock, 2,000 of which will be issued pursuant to
this Agreement; and on the Closing Date there will be no material increase from
July 11, 1997 in the number of shares of Common Stock outstanding. As of July
11, 1997, the Company had outstanding 1,155,000 options and 3,067,500 warrants
entitling the holders to purchase an aggregate of 4,222,500 shares of Common
Stock. Other than as set forth in the preceding sentence, the Company does not
have outstanding any material amount of securities (or obligations to issue any
such securities) convertible into, exchangeable for or otherwise entitling the
holders thereof to acquire shares of Common Stock. The outstanding shares of
Common Stock and outstanding options, warrants and other securities to purchase
Common Stock have been duly authorized and validly issued. None of such
outstanding shares of Common Stock, options, warrants and other securities has
been issued in violation of the preemptive rights of any security holder of the
Company. The offers and sales of the outstanding shares of Common Stock and
options, warrants and other rights to acquire Common Stock were at all relevant
times either registered under the 1933 Act and applicable state securities laws
or exempt from such requirements. No holder of any of the Company's securities
has any rights, "demand," "piggyback" or otherwise, to have such securities
registered by reason of the intention to file, filing or effectiveness of the
Registration Statement (as defined in the Registration Rights Agreement).
(C) CONCERNING THE SHARES AND THE COMMON STOCK. The Shares have been
duly authorized. The Initial Preferred Shares, when issued and paid for in
accordance with this Agreement, the Additional Preferred Shares, when issued in
accordance with the Registration Rights Agreement, and the Common Shares, when
issued upon conversion of the Preferred Shares, in payment of dividends on the
Preferred Shares or upon exercise of the Warrant, as the case may be, will be
duly and validly issued, fully paid and non-assessable and will not subject the
holder thereof to personal liability by reason of being such holder. There are
no preemptive or similar rights of any stockholder of the Company or any other
person to acquire any of the Shares. The Common Stock is listed for trading on
the Nasdaq SmallCap Market ("Nasdaq") and (1) the Company and the Common Stock
meet the criteria for continued listing and trading on Nasdaq; (2) except as
listed on Schedule 3(c), the Company has not been notified since January 1, 1995
by Nasdaq of any failure or potential failure to meet the criteria for continued
listing and trading on Nasdaq and (3) no suspension of trading in the Common
Stock is in effect. The Company knows of no reason that the Common Shares will
not be eligible for listing on Nasdaq.
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(D) SUBSCRIPTION AGREEMENT; CERTIFICATE OF DESIGNATIONS; REGISTRATION
RIGHTS AGREEMENT; WARRANT; TRANSFER AGENT INSTRUCTIONS. This Agreement, the
Certificate of Designations, the Registration Rights Agreement, the Warrant and
the Transfer Agent Instructions have been duly and validly authorized by the
Company, this Agreement has been duly executed and delivered on behalf of the
Company and this Agreement is, and the Registration Rights Agreement, the
Warrant and the Transfer Agent Instructions, when executed and delivered by the
Company, will be, valid and binding obligations of the Company enforceable in
accordance with their respective terms, subject as to enforceability to general
principles of equity and to bankruptcy, insolvency, moratorium and other similar
laws affecting the enforcement of creditors' rights generally and limits upon
rights to indemnity.
(E) NON-CONTRAVENTION. The execution and delivery of this Agreement by
the Company and the other documents contemplated by this Agreement and the
consummation by the Company of the issuance of the Initial Preferred Shares and
the Warrant as contemplated by this Agreement, the issuance of the Additional
Preferred Shares as contemplated by the Registration Rights Agreement and the
other transactions contemplated by this Agreement, the Registration Rights
Agreement, the terms of the Preferred Stock, the Warrant and the Transfer Agent
Instructions do not and will not with or without the giving of notice or the
lapse of time, or both, (i) result in any violation of any term of the
Certificate of Incorporation or By-laws of the Company or any of its
Subsidiaries, (ii) conflict with or result in a breach by the Company or any of
its Subsidiaries of any of the terms or provisions of, or constitute a default
under, or result in the modification of, or result in the creation or imposition
of any lien, security interest, charge or encumbrance upon any of the properties
or assets of the Company or any of its Subsidiaries pursuant to, any indenture,
mortgage, deed of trust or other agreement or instrument to which the Company or
any of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries or any of their respective properties or assets is bound or
affected or (iii) violate or contravene any applicable law, rule or regulation
or any applicable decree, judgment or order of any court, United States federal
or state regulatory body, administrative agency or other governmental body
having jurisdiction over the Company or any of its Subsidiaries or any of their
respective properties or assets or (iv) have any material adverse effect on any
permit, certification, registration, approval, consent, license or franchise
necessary for the Company or any of its Subsidiaries to own or lease and operate
any of their respective properties or to conduct any of their respective
businesses or the ability of the Company or any of the Subsidiaries to make use
thereof.
(F) APPROVALS. No authorization, approval or consent of any court,
governmental body, regulatory agency, self-regulatory organization, or stock
exchange or market or the Stockholders of the Company is required to be obtained
by the Company for (1) the execution, delivery and performance by the Company of
this Agreement, the Registration Rights Agreement (except such authorization of
the SEC as is required with respect to accelerating the effectiveness of any
registration statement filed pursuant thereto), the Warrant and the Transfer
Agent Instructions, (2) the execution, filing and performance by the Company of
the Certificate of Designations, (3) the issuance and sale of the Initial
Preferred Shares and the Warrant as contemplated by this Agreement. (4) the
issuance of the Additional Preferred Shares as contemplated by the Registration
Rights Agreement and (5) the issuance of Conversion Shares on conversion of the
Preferred Shares, the issuance of Dividend Shares as dividends on the Preferred
Shares or the issuance of Warrant Shares upon exercise of the Warrant, other
than (w) listing of the Common Shares on Nasdaq, (x) registration of the resale
of the Common Shares under the 1933 Act as contemplated by the Registration
Rights Agreement, (y) as may be required under applicable state securities or
"blue sky" laws and (z) filling of one or more Forms D with respect to the
Securities as required under Regulation D.
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<PAGE>
(G) INFORMATION PROVIDED. The information provided by or on behalf of
the Company to the Buyer in connection with the transactions contemplated by the
Agreement, including, without limitation, the information referred to in Section
2(e) of this Agreement, does not contain any untrue statement of a material fact
or omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they are made, not
misleading. The Company has not filed any reports with the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended (the
"1934 Act") since December 31, 1996 other than the 1996 10-K and the March 31
10-Q.
(H) ABSENCE OF CERTAIN CHANGES. Since December 31, 1996, there has
been no material adverse change and no material adverse development in the
business, properties, operations, condition (financial or other), results of
operations or prospects of the Company or any of the Subsidiaries, except as
disclosed in the SEC Reports.
(I) ABSENCE OF CERTAIN PROCEEDINGS. There is no action, suit or
proceeding, before or by any court, public board or body or governmental agency
pending or, to the knowledge of the Company or any of the Subsidiaries,
threatened against the Company or any of the Subsidiaries and there is no
inquiry or investigation before or by any court, public board or body or
governmental agency pending or, to the knowledge of the Company or any of the
Subsidiaries, threatened against the Company or any of the Subsidiaries, in any
such case wherein an unfavorable decision, ruling or finding would have a
material adverse effect on the business, properties, the, condition (financial
or other), results of operations or prospects of the Company and the
Subsidiaries taken as a whole or the transactions contemplated by this Agreement
or any of the documents contemplated hereby or which would adversely affect the
validity or enforceability of, or the authority or ability of the Company to
perform its obligations under, this Agreement or any of such other documents;
the Company does not have pending before the SEC any request for confidential
treatment of information and to the best of the Company's knowledge no such
request will be made by the Company prior to the time the Registration Statement
relating to the Common Shares which is contemplated by the Registration Rights
Agreement is first ordered effective by the SEC; and there has not been, and to
the best of the Company's knowledge there is not pending or contemplated, any
investigation by the SEC involving the Company or any current or former director
or officer of the Company.
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(J) PROPERTIES. The Company and the Subsidiaries have good title to
all property real and personal (tangible and intangible) and other assets owned
by them, free and clear of all security interests, charges, mortgages, liens or
other encumbrances, except such as are described in the SEC Reports or such as
do not materially interfere with the use of such property made, or proposed to
be made, by the Company or the Subsidiaries. The leases, licenses or other
contracts or instruments under which the Company and the Subsidiaries lease,
hold or are entitled to use any property, real or personal, are valid,
subsisting and enforceable with only such exceptions as do not materially
interfere with the use of such property made, or proposed to be made, by the
Company or its Subsidiaries except as disclosed on Schedule 3(j). Neither the
Company nor any of the Subsidiaries has received notice of any material
violation of any applicable law, ordinance, regulation, order or requirement
relating to its owned or leased properties.
(K) LABOR RELATIONS. No material labor problem exists or, to the
knowledge of the Company, is imminent with respect to any of the employees of
the Company or any of the Subsidiaries.
(L) SEC FILINGS. The Company has timely filed all required forms,
reports and other documents with the SEC. All of such forms, reports and other
documents complied, when filed, in all material respects, with all applicable
requirements of the 1933 Act and the 1934 Act. The Company meets the
requirements for the use of Form S-3 for the registration of the resale of the
Shares by the Buyer.
(M) ABSENCE OF BROKERS, FINDERS, ETC. No broker, finder or similar
person is entitled to any commission, fee or other compensation by reason of the
transactions contemplated by this Agreement other than as disclosed in writing
by the Company to the Buyer prior to execution and delivery of this Agreement by
the Buyer, and the Company shall pay, and indemnify and hold harmless the Buyer
from, any claim made against the Buyer by any person for any such commission,
fee or other compensation.
4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS
(A) TRANSFER RESTRICTIONS. The Buyer acknowledges that (1) the
Preferred Shares and the Warrant have not been and are not being registered
under the provisions of the 1933 Act and, except as provided in the Registration
Rights Agreement, the Common Shares have not been and are not being registered
under the 1933 Act, and the Securities may not be transferred unless (A)
subsequently registered thereunder or (B) the Buyer shall have delivered to the
Company an opinion of counsel, reasonably satisfactory in form, scope and
substance to the Company, to the effect that the Securities to be sold or
transferred may be sold or transferred pursuant to an exemption from such
registration; (2) any resale of the Securities made in reliance on Rule 144
promulgated under the 1933 Act may be made only in accordance with the terms of
said Rule and further, if said Rule is not applicable, any such resale of
Securities under circumstances in which the seller, or the person through whom
the sale is made, may be deemed to be an underwriter, as that term is used in
the 1933 Act, may require compliance with some other exemption under the 1933
Act or the rules and regulations of the SEC thereunder; and (3) neither the
Company nor any other person is under any obligation to register the Securities
(other than pursuant to the Registration Rights Agreement) under the 1933 Act or
to comply with the terms and conditions of any exemption thereunder (other than
pursuant to Section 4(d) hereof and pursuant to the Registration Rights
Agreement).
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(B) RESTRICTIVE LEGEND. (1) The Buyer acknowledges and agrees that the
Preferred Shares shall bear a restrictive legend in substantially the following
form (and a stop transfer order may be placed against transfer of the Preferred
Shares):
The securities represented by this certificate have not been registered under
the Securities Act of 1933, as amended. The securities have been acquired for
investment and may not be sold, transferred or assigned in the absence of an
effective registration statement for the securities under the Securities Act of
1933, as amended, or an opinion of counsel that registration is not required
under said Act.
(2) The Buyer further acknowledges and agrees that the Warrant shall
bear a restrictive legend in substantially the following form (and a
stop-transfer order may be placed against transfer of the Warrant):
The securities represented by this certificate have not been registered under
the Securities Act of 1933, as amended. The securities have been acquired for
investment and may not be resold, transferred or assigned in the absence of an
effective registration statement for the securities under the Securities Act of
1933, as amended, or an opinion of counsel that registration is not required
under said Act.
(3) The Buyer further acknowledges and agrees that until such time as
the Common Shares have been registered for resale under the 1933 Act as
contemplated by the Registration Agreement, the certificates for the Common
Shares may bear a restrictive legend in substantially the following form (and a
stop-transfer order may be placed against transfer of the certificates for the
Common Shares):
The securities represented by this certificate have not been registered under
the Securities Act of 1933, as amended. The securities have been acquired for
investment and may not be resold, transferred or assigned in the absence of an
effective registration statement for the securities under the Securities Act of
1933, as amended, or an opinion of counsel that registration is not required
under said Act.
Once the Registration Statement required to be Cited by the Company pursuant to
Section 2 of the Registration Rights Agreement has been declared effective,
thereafter (1) upon request of the Buyer the Company will substitute
certificates without restrictive legend for certificates for any Common Shares
issued prior to the date such Registration Statement is declared effective by
the SEC which bear such restrictive legend and remove any stop-transfer
restriction relating thereto promptly, but in no event later than three days
after surrender of such certificates by the Buyer and (2) the Company shall not
place any restrictive legend on certificates for Common Shares issued on
conversion of or payment of dividends on the Preferred Shares or upon exercise
of the Warrant or impose any stop-transfer restriction thereon.
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(C) REGISTRATION RIGHTS AGREEMENT. The parties hereto agree to enter
into the Registration Rights Agreement on or before the Closing Date.
(D) FORM D; BLUE SKY LAWS. The Company agrees to file a Form D with
respect to the Shares as required under Regulation D and to provide a copy
thereof to the Buyer promptly after such filing. The Buyer agrees to cooperate
with the Company in connection with such filing and, upon request of the
Company, to provide all information relating to the Buyer reasonably required
for such filing
(E) AUTHORIZATION FOR TRADING; REPORTING STATUS. On or before the
Closing Date, the Company shall file a notification for listing of additional
shares with the Nasdaq and shall provide evidence of such filing to the Buyer.
So long as the Buyer beneficially owns any of the Preferred Shares, the Warrant
or the Common Shares, the Company shall file all reports required to be filed
with the SEC pursuant to Section 13 or 15(d) of the 1934 Act and the Company
shall not terminate its status as an issuer required to file reports under the
1934 Act even if the 1934 Act or the rules and regulations thereunder would
permit such termination.
(F) USE OF PROCEEDS. Neither the Company nor any subsidiary of the
Company owns or has any present intention of acquiring any "margin stock" as
defined in Regulation G (12 CFR Part 207) of the Board of Governors of the
Federal Reserve System ("margin stock"). The proceeds of sale of the Preferred
Shares will be used for general working capital purposes and in the operation of
the Company's business. None of such proceeds will be used, directly or
indirectly (1) (other than financing its subsidiaries in the ordinary course of
business) to make any loan to or investment in any other person or (2) for the
purpose, whether immediate, incidental or ultimate, of purchasing or carrying
any margin stock or for the purpose of maintaining, reducing or retiring any
indebtedness which was originally incurred to purchase or carry any stock that
is currently a margin stock or for any other purpose which might constitute the
transactions contemplated by this Agreement a "purpose credit" within the
meaning of such Regulation G. Neither the Company nor any agent acting on its
behalf has taken or will take any action which might cause this Agreement or the
transactions contemplated hereby to violate Regulation G, Regulation T or any
other regulation of the Board of Governors of the Federal Reserve System or to
violate the 1934 Act, in each case as in effect now or as the same may hereafter
be in effect.
(G) BLUE SKY LAWS. On or before the Closing Date, the Company shall
take such action as shall be necessary to qualify, or to obtain an exemption
for, the Initial Preferred Shares for sale to the Buyer pursuant to this
Agreement, the Additional Preferred Shares for issuance to the Buyer pursuant to
the Registration Rights Agreement, the Warrant for issuance to the Buyer
pursuant to this Agreement and the Common Shares for issuance to the Buyer on
conversion of or dividends on the Preferred Shares or exercise of the Warrants
under such of the securities or "blue sky" laws of jurisdictions as shall be
applicable to the sale of the Initial Preferred Shares pursuant to this
Agreement, issuance of the Additional Preferred Shares pursuant to the
Registration Rights Agreement and the issuance to the Buyer of Common Shares on
conversion of or as dividends on the Preferred Shares of the Warrant pursuant to
this Agreement, and the issuance or upon exercise of the Warrants. The Company
shall furnish copies of all filings, applications, orders and grants or
confirmations of exemptions relating to such securities or "blue sky" laws on or
prior to the Closing Date. The cost of obtaining additional blue sky clearances
in additional states beyond the Company's current blue sky clearances listed on
Schedule 3(g) shall be borne by the holders requesting such clearances.
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(H) CERTAIN EXPENSES. Whether or not the closing occurs, the Company
shall pay or reimburse Plazacorp Investments Limited for all reasonable expenses
(including, without limitation, legal fees and expenses of counsel to Plazacorp
Investments Limited) incurred by Plazacorp Investments Limited, not in excess of
$10,000, in connection with this Agreement and the transactions contemplated
hereby.
(I) CERTAIN ISSUANCES OF SECURITIES. (1) If the transactions
contemplated by this Agreement are subject to the rules proposed to be adopted
by Nasdaq which would require stockholder approval of certain transactions (the
"Nasdaq Stockholder Approval Rules"), then unless the Company obtains
Stockholder Approval (as defined in the Certificate of Designations) or a waiver
thereof from Nasdaq, the Company will not issue any shares of Common Stock or
shares of any other series of preferred stock or other securities convertible
into, exchangeable for or otherwise entitling the holder to acquire shares of
Common Stock which would be subject to the Nasdaq (or any successor or
replacement provision thereof) and which would be integrated with the sale of
the Preferred Shares to the Buyer or the issuance of Common Shares upon
conversion thereof Stockholder Approval Rules for purposes of the Nasdaq
Stockholder Approval Rules (or any successor or replacement provision thereof).
(2) During the period from the date of this Agreement to the date on
which the Registration Statement (as defined in the Registration Rights
Agreement) shall have been effective with the SEC for 60 consecutive days, the
Company shall not offer, sell, contract to sell or issue (or engage any person
to assist the Company in taking any such action) any equity securities or
securities convertible into, exchangeable for or otherwise entitling the holder
to acquire, any Common Stock (collectively, "Equity Securities") at a price
below the market price of the Common Stock without (a) giving the Buyer the
first right to acquire the Equity Securities on the same terms at which the
Equity Securities are to be offered to other investors (and on terms which
permit the Buyer to purchase a pro rata portion of such Equity Securities, based
on the portion of the shares of Preferred Stock purchased by the Buyer pursuant
to this Agreement), and (b) obtaining consent of the holders of a majority of
the shares of the Preferred Shares which consent will not unreasonably be
withheld; provided, however, that nothing in this Section 4(i)(2) shall prohibit
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the Company from issuing securities (x) pursuant to compensation plans for
employees, directors, officers, advisers or consultants of the Company and in
accordance with the terms of such plans as in effect as of the date of this
Agreement, (y) upon exercise of conversion, exchange, purchase or similar rights
issued, granted or given by the Company and outstanding as of the date of this
Agreement or (z) in connection with the acquisition of all or substantially all
the assets or stock of another entity.
(J) CERTAIN TRADING RESTRICTIONS. The Buyer agrees that during the
------------------------------
period from the Closing Date to the date of conversion in full or redemption of
all Preferred Shares owned by the Buyer, the Buyer shall not engage in short
sales with respect to the Common Stock, provided that the foregoing shall not be
deemed to restrict the Buyer from offering to sell shares of Common Stock during
the two Business Days immediately prior to the Buyer's delivery of a Notice of
Conversion.
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(K) BEST EFFORTS. Each of the parties shall use its best efforts
-------------
timely to satisfy each of the conditions to the other party's obligations to
sell and purchase the Preferred Shares set forth in Section 7 or 8, as the case
may be, of this Agreement on or before the Closing Date.
5. TRANSFER AGENT INSTRUCTIONS; CONVERSION PROCEDURE.
(A) TRANSFER AGENT INSTRUCTIONS. Promptly following the delivery by
the Buyer of the aggregate purchase price for the Initial Preferred Shares in
accordance with Section 1(c) hereof, and in any event prior to the Closing Date,
the Company will (1) execute and deliver the Transfer Agent Instructions
substantially in the form attached hereto as ANNEX V to and thereby irrevocably
instruct, American Stock Transfer & Trust Company, as Transfer Agent and
Registrar (the "Transfer Agent"), to issue certificates for the Common Shares
from time to time upon conversion of the Preferred Shares and exercise of the
Warrant in such amounts as specified from time to time to the Transfer Agent in
the Notices of Conversion surrendered in connection with such conversions and
referred to in Section 5(b) of this Agreement and the Form of Subscription in
the form attached to the Warrant and (2) appoint the Transfer Agent the
conversion agent for the Preferred Stock and the exercise agent for the Warrant.
The certificates for the Common Shares may bear the restrictive legend specified
in Section 4(b) of this Agreement prior to registration of the resale of the
Common Shares under the 1933 Act. The certificates for the Common Shares shall
be registered in the name of the Buyer or its nominee and in such denominations
to be specified by the Buyer in connection with each conversion of Preferred
Shares or the exercise of the Warrant. The Company warrants that no instruction
other than (x) such instructions referred to in this Section 5, (y) stop
transfer instructions to give effect to Section 4(a) hereof prior to
registration of the resale of the Common Shares under the 1933 Act and (z) the
instructions required by Section 3(n) of tile Registration Rights Agreement will
be given by the Company to the Transfer Agent and that the Common Shares shall
otherwise be freely transferable on the books and records of the Company as and
to the extent provided in this Agreement. Nothing in this Section 5(a) shall
limit in any way the Buyer's obligations and agreement to comply with all
applicable securities laws upon resale of the Shares. If the Buyer provides the
Company with an opinion of counsel reasonably satisfactory in form, scope and
substance to the Company that registration of a resale by the Buyer of any of
the Shares in accordance with clause (1)(B) of Section 4(a) of this Agreement is
not required under the 1933 Act, the Company shall permit the transfer of such
Shares and, in the case of the Common Shares, promptly, but in no event later
than three days after receipt of such opinion, instruct the Company's transfer
agent to issue upon transfer one or more share certificates in such name and in
such denominations as specified by the Buyer. Nothing in this Section 5(a)
shall limit the obligations of the Company under Section 3(n) of the
Registration Rights Agreement.
(B) CONVERSION PROCEDURE. In connection with the exercise of
conversion rights relating to the Preferred Shares, the Buyer or any subsequent
holder of the Preferred Shares shall complete, sign and furnish to the Transfer
Agent a Notice of Conversion in the form attached hereto as Annex VI, which
shall be deemed to satisfy all requirements of the Certificate of Designations.
6. CLOSING DATE.
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The date and time of the issuance and sale of the Initial Preferred Shares
and the issuance of the Warrant (the "Closing Date") shall be 12:00 noon, New
York City time, on the date which is three Business Days after the date on which
the Buyer has deposited the purchase price for the Preferred Shares with the
Escrow Agent in accordance with Section l(c) hereof, or such other mutually
agreed to time. The closing shall occur on the Closing Date at the offices of
the Escrow Agent.
7. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL AND ISSUE.
The Buyer understands that the Company's obligation to sell the Initial
Preferred Shares and issue the Warrant to the Buyer pursuant to this Agreement
is conditioned upon the satisfaction of the following conditions precedent on or
before the Closing Date (any or all of which may be waived by the Company in its
sole discretion):
(A) The receipt and acceptance by the Company of this Agreement as
evidenced by execution of this Agreement by the Company and delivery of an
executed counterpart of this Agreement to the Buyer or its legal counsel;
(B) Delivery by the Buyer to the Escrow Agent of good funds as payment
in full of an amount equal to the purchase price for the Initial Preferred
Shares in accordance with Section l(c) hereof; and conversion thereof
Stockholder Approval Rules for purposes of the Nasdaq Stockholder Approval Rules
(or any successor or replacement provision thereof).
(C) The accuracy on the Closing Date of the representations and
warranties of the Buyer contained in this Agreement as if made on the Closing
Date and the performance by the Buyer on or before the Closing Date of all
covenants and agreements of the Buyer required to be performed on or before the
Closing Date.
8. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.
The Company understands that the Buyer's obligation to purchase the Initial
Preferred Shares and acquire the Warrant on the Closing Date is conditioned upon
the satisfaction of the following conditions precedent on or before the Closing
Date (any or all of which may be waived by the Buyer in its sole discretion):
(A) Delivery by the Company to the Escrow Agent of the certificates for
the Initial Preferred Shares and the Warrant in accordance with this Agreement;
(B) The accuracy on the Closing Date of the representations and
warranties of the Company contained in this Agreement as if made on the Closing
Date and the performance by the Company on or before the Closing Date of all
covenants and agreements of the Company required to be performed on or before
the Closing Date and receipt by the Buyer of a certificate, dated the Closing
Date, of the Chief Executive Officer or the Chief Financial Officer of the
Company confirming such matters and such other matters as the Buyer may
reasonably request;
(C) The receipt by the Buyer of confirmation of the filing with the
Secretary of State of the State of Delaware of the Certificate of Designations;
12
<PAGE>
(D) The receipt by the Buyer of a certificate, dated the Closing Date,
of the Secretary of the Company certifying (1) the Certificate of Incorporation
and By-Laws of the Company as in effect on the Closing Date, (2) all resolutions
of the Board of Directors (and committees thereof) of the Company relating to
this Agreement and the transactions contemplated hereby and (3) such other
matters as reasonably requested by the Buyer; and
(E) Receipt by the Buyer on the Closing Date of an opinion of counsel
for the Company, dated the Closing Date, in form, scope and substance reasonably
satisfactory to the Buyer, to the effect set forth in ANNEX VII attached hereto.
9. MISCELLANEOUS.
(A) GOVERNING LAW. This Agreement shall be governed by and
interpreted in accordance with the laws of the State of New York.
(B) COUNTERPARTS. This Agreement may be executed in counterparts and
by the parties hereto on separate counterparts, all of which together shall
constitute one and the same instrument. A facsimile transmission of this
Agreement bearing a signature on behalf of a party hereto shall be legal and
binding on such party.
(C) HEADINGS, ETC. The headings, captions and footers of this
Agreement are for convenience of reference and shall not form part of, or affect
the interpretation of, this Agreement.
(D) SEVERABILITY. If any provision of this Agreement shall be invalid
or unenforceable in any jurisdiction, such invalidity or unenforceability shall
not affect the validity or enforceability of the remainder of this Agreement or
the validity or enforceability of this Agreement in any other jurisdiction.
(E) AMENDMENTS. No amendment, modification, waiver, discharge or
termination of any provision of this Agreement nor consent to any departure by
the Buyer or the Company therefrom shall in any event be effective unless the
same shall be in writing and signed by the party to be charged with enforcement,
and then shall be effective only in the specific instance and for the purpose
for which given. No course of dealing between the parties hereto shall operate
as an amendment of this Agreement.
(F) WAIVERS. Failure of any party to exercise any right or remedy
under this Agreement or otherwise, or delay by a party in exercising, such right
or remedy, or any course of dealings between the parties, shall not operate as a
waiver thereof or an amendment hereof, nor shall any single or partial exercise
of any such right or power, or any abandonment or discontinuance of steps to
enforce such a right or power preclude any other or further exercise thereof or
exercise of any other fight or power.
(G) NOTICES. Any notices required or permitted to be given under the
terms of this Agreement shall be sent by mail or delivered personally (which
shall include telephone line facsimile transmission with answer back
confirmation) or by courier and shall be effective five days after being placed
in the mail, if mailed, or upon receipt, if delivered personally or by courier,
in the case of the Company addressed to the Company at its address shown in the
introductory paragraph of this Agreement, Attention: Chief Executive Officer
(telephone line facsimile transmission number (512) 472-4307) or, in the case of
the Buyer, at its address shown on the signature page of this Agreement, or such
other address as a party shall have provided by notice to the other party in
accordance with this provision. The Buyer hereby designates as its address for
any notice required or permitted to be given to the Buyer pursuant to the
Certificate of Designations the address shown on the signature page of this
agreement, with a copy to: Plazacorp Investments United, 3845 Bathurst Street,
Suite 202, North York, Ontario, M3H 3N2 Canada until the Buyer shall designate
another address for such purpose.
13
<PAGE>
(H) ASSIGNMENT. Prior to the Closing Date, the Buyer shall have the
right to assign its rights and obligations under this Agreement with respect to
the purchase of all or any portion of the Initial Preferred Shares and the
issuance of the Warrants, provided any such assignee, by written instrument duly
executed by such assignee, assumes all obligations of the Buyer hereunder with
respect to the purchase of the portion of the Preferred Shares or the Warrant so
assigned and makes the same representations and warranties with respect thereto
as the Buyer makes in this Agreement, whereupon the Buyer shall be relieved of
any further obligations, responsibilities and liabilities with respect to the
purchase of all or the portion of the Preferred Shares the obligation for the
purchase of which has been so assigned. In the case of any such assignment, the
Company shall agree in writing with such assignee to make available to such
assignee the benefits of the Registration Rights Agreement with respect to the
Common Shares issuable on conversion of the Preferred Shares or exercise of the
Warrant with respect to which the purchase under this Agreement has been so
assigned. Any transfer of the Preferred Shares or the Warrant by the Buyer
after the Closing Date shall be made in accordance with Section 4(a).
(I) SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The respective
representations, warranties, covenants and agreements of the Buyer and the
Company contained in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement shall survive the delivery of payment
for the Preferred Shares and shall remain in full force and effect regardless of
any investigation made by or on behalf of them or any person controlling or
advising any of them.
(J) ENTIRE AGREEMENT. This Agreement and its Annexes set forth the
entire agreement between the parties hereto with respect to the subject matter
hereof and supersede all prior agreements and understandings, whether written or
oral, with respect thereto.
(K) TERMINATION. The Buyer shall have the right to terminate this
Agreement by giving notice to the Company at any time at or prior to the Closing
Date if:
(1) the Company shall have failed, refused, or been unable at or prior
to the date of such termination of this Agreement to perform any of its
obligations hereunder;
(2) any other condition of the Buyer's obligations hereunder is not
fulfilled; or
(3) the closing shall not have occurred on a Closing Date on or before
August 7, 1997, other than solely by reason of a breach of this Agreement by the
Buyer.
14
<PAGE>
Any such termination shall be effective upon the giving of notice thereof by the
Buyer. Upon such termination, the Buyer shall have no further obligation to the
Company hereunder and the Company shall remain liable for any breach of this
Agreement or the other documents contemplated hereby which occurred on or prior
to the date of such termination.
(L) FURTHER ASSURANCES. Each party to this Agreement will perform any
and all acts and execute any and all documents as may be necessary and proper
under the circumstances in order to accomplish the intents and purposes of this
Agreement and to carry out its provisions.
(M) PUBLIC STATEMENTS, PRESS RELEASES, ETC. The Company and the Buyer
shall have the Right to approve before issuance any press releases or any other
public statements with respect to the transactions contemplated hereby;
provided, however, that the Company shall be entitled, without the prior
approval of the Buyer, to make any press release or other public disclosure with
respect to such transactions as is required by applicable law and regulations
(although the Buyer shall be consulted by the Company in connection with any
such press release or other public disclosure prior to its release and shall be
provided with a copy thereof).
(N) CONSTRUCTION. The language used in this Agreement will be deemed
to be the language chosen by the parties to express their mutual intent, and no
rules of strict construction will be applied against any party.
IN WITNESS WHEREOF, this Agreement has been duly executed by the Buyer or
one of its officers thereto duly authorized as of the date set forth below.
NUMBER OF SHARES: _________
PRICE PER SHARE: $1,000.00
AGGREGATE PURCHASE PRICE: $_________________
BUYER: _________________
SIGNATURE: _______________________________________
Address:
COMPANY: AMERICAN GAMING & BINGO CORP.
By: ______________________________________________
Title:
15
<PAGE>
<TABLE>
<CAPTION>
LIST OF INVESTORS UNDER SERIES A CONVERTIBLE
PREFERRED STOCK FINANCING
Stockholder Number of Shares
- ----------------------- ----------------
<S> <C>
Plazacorp Investments 80
P.R.I.F. #4 1,150
David Heller 520
Sam Reisman 250
----------------
Total 2,000
================
</TABLE>
16
<PAGE>
AMENDED AND RESTATED
EMPLOYEE STOCK OPTION PLAN
AMERICAN BINGO & GAMING CORP.
1994 STOCK OPTION PLAN
1. PURPOSE
The purpose of the 1994 Stock Option Plan (the "Plan") is to provide a
method whereby selected key employees of American Bingo & Gaming Corp. (the
"Corporation"), selected key consultants, professionals and non employee
Directors may have the opportunity to invest in shares of Common Stock (the
"Stock") of the Corporation, thereby giving them a proprietary and vested
interest in the growth and performance of the Corporation, and in general,
generating an increased incentive to contribute to the Corporation's future
success and prosperity, thus enhancing the value of the Corporation for the
benefit of shareholders. Further, the Plan is designed to enhance the
Corporation's ability to attract and retain individuals of exceptional
managerial talent upon whom, in large measure, the sustained progress, growth,
and profitability of the Corporation depends.
2. ADMINISTRATION
The Plan shall be administered by the Corporation's Board of Directors
("the Board") or if so designated by resolution of the Board by a Committee
composed of not less than three individuals ("Committee"). From time to time the
Board, or if so designated the Committee, may grant stock options to such
eligible parties and for such number of shares as it in its sole discretion may
determine. A grant in any year to an eligible Employee, (as defined in Section 3
below) shall neither guarantee nor preclude a grant to such Employee in
subsequent years. Subject to the provisions of the Plan, the Board, or if so
designated the Committee, shall be authorized to interpret the Plan, to
establish, amend and rescind any rules and regulations relating to the Plan, to
determine the terms and provisions of the option agreements described in Section
5(h) thereof to make all other determinations necessary or advisable for the
administration of the Plan. The Board, or if so designated the Committee, may
correct any defect, supply any omissions or reconcile any inconsistency in the
Plan or in any option in the manner and to the extent it shall deem desirable.
The determinations of the Board, or if so designated the Committee, in the
administration of the Plan, as described herein, shall be final and conclusive.
The validity, construction, and effect of Plan and any rules and regulations
relating to the Plan shall be determined in accordance with the laws of the
State of Delaware.
3. ELIGIBILITY
The class of employees eligible to participate under the Plan (the
"Employees") shall be key employees of the Corporation, its key consultants or
professionals and Non-employee Directors of the Company. Nothing in the Plan or
in any agreement thereunder shall confer any right on an Employee or key vendor
of goods and services to continue in the employ of the Corporation or shall
interfere in any way with the right of the Corporation or its subsidiaries, as
the case may be, to terminate his employment at any time.
<PAGE>
4. SHARES SUBJECT TO THE PLAN
Subject to adjustment as provide in Section 7, an aggregate of 250,000
shares of Stock shall be available for issuance under the Plan. The shares of
Stock deliverable upon the exercise of options may be made available from
authorized but unissued shares or shares reacquired by the Corporation,
including shares purchased in the open market or in private transactions. If any
option granted under the Plan shall terminate for any reason without having been
exercised or settled in Stock or in cash pursuant to related stock appreciation
rights, the shares subject to, but not delivered under, such option shall be
available for other options.
5. GRANT TERM AND CONDITIONS OF OPTIONS
The Board or if so designated the Committee, may from time to time after
consultation with management select employees to whom stock options shall be
granted. The options granted may be "incentive stock options" within the meaning
of Section 422 of the Internal Revenue Code, as amended (the "Code"), or
nonstatutory stock options whichever the Board, or if so designated the
Committee, shall determine, subject to the following terms and conditions:
(a) Price. The purchase price per share of Stock deliverable upon
-----
exercise of each incentive Stock option shall not be less than 100 percent of
the Fair Market Value of the Stock on the date such the option is granted.
Provided, however, that if an incentive Stock option is issued to an individual
who owns, at the time of grant, more than ten percent (10%) of the total
combined voting power of all classes of the Company's Stock, the Exercise price
of such option shall be at least 110% of the Fair Market Value of the common
Stock on the date of grant. The option price of shares subject to non-statutory
Stock options shall be determined by the Board of Directors or Committee, in its
absolute discretion at the time of grant of such option. For purposes of this
plan, Fair Market Value shall be the average of the closing Bid and Ask prices
for the Stock on the date in question.
(b) Payment. Options may be exercised only upon payment of the
-------
purchase price thereof in full. Such payment shall be made in such form of
consideration as the Board or Committee determines and may vary for each option.
Payment may consist of cash, check, notes, delivery of shares of common stock
having a fair market value on the date of surrender equal to the aggregate
exercise price, or any combination of such methods or other means of payment
permitted under the Delaware General Corp. Law.
(c) Term of Options. The term during which each option may be
-----------------
exercised shall be determined by the Board, or if so designated the Committee,
provided that (i) a nonstatutory option shall not be exercisable in whole or in
part more than 10 years from the date it is granted except as provided in
paragraph (e), below, with respect to the death of the Employee, and (ii) an
incentive stock option shall not be exercisable in whole or in part more than 10
years from the date it is granted. All rights to purchase Stock pursuant to an
option shall, unless sooner terminated, expire at the date designated by the
Board or, if so designated by the Committee.
2
<PAGE>
The Board, or if so designated the Committee, shall determine the date on
which each option shall become exercisable and may provide that an option shall
become exercisable in installments. The shares comprising each installment may
be purchased in whole or in part at any time after such installment becomes
purchasable, except that the exercise of incentive stock options shall be
further restricted as set forth herein. The Board, or if so designated the
Committee, may in its sole discretion, accelerate the time at which any option
may be exercised in whole or in part, provided that unless otherwise determined
by the Board, or if so designated the Committee, no option shall be exercisable
until one year after grant.
(d) Limitations on Grants. For Options granted on or before December
-----------------------
31, 1986 the aggregate Fair Market Value (determined as of the time the option
is granted) of the Stock for which any employee may be granted incentive stock
options shall not exceed the sum of (i) $100,000 and (ii) any unused limit
carryover calculated under Section 422 of the Code with respect to such
Employee. For incentive stock options granted on or after January 1, 1987, the
aggregate Fair Market Value (determined at the time the option is granted) of
the stock with respect to which the investment stock option is exercisable for
the first time by an optionee during any calendar year (under all plans of the
Company and its parent or any subsidiary of the Corporation) shall not exceed
$100,000. The foregoing limitations shall be modified from time to time to
reflect any changes in Section 422 of the Code and any regulations promulgated
thereunder setting forth such limitations.
(e) Termination of Employment.
---------------------------
(i) If the employment of an Employee by the Company or a
subsidiary corporation of the Company shall be terminated voluntarily by the
Employee or for cause by the Company, then his Option shall expire forthwith
unless otherwise determined by the Board, or if so designated the Committee.
Except as provided in subparagraphs (ii) and (iii) of this Paragraph (e), if
such employment shall terminate for any other reason, unless otherwise
determined by the Board, or if so designated the Committee, then such Option may
be exercised at any time within three (3) months after such termination, subject
to the provisions of subparagraph (iv) of this Paragraph (e). For purposes of
this subparagraph, an employee who leaves the employ of the Company to become an
employee of a subsidiary corporation of the Company or a corporation (or
subsidiary or parent corporation of the corporation) which has assumed the
Option of the Company as a result of a corporate reorganization, etc., shall not
be considered to have terminated his employment.
(ii) If the holder of an Option under the Plan dies (a) while
employed by, or while serving as a non-employee Director for, the Company or a
subsidiary corporation of the Company, or (b) within three (3) months after the
termination of his employment or services other than voluntarily by the employee
or non-employee Director, or for cause, then such Option may, subject to the
provisions of subparagraph (iv) of this Paragraph (e), be exercised by the
estate of the employee or non-employee Director or by a person who acquired the
right to exercise such Option by bequest or inheritance or by reason of the
death of such employee or non-employee Director at any time within one (1) year
after such death.
3
<PAGE>
(iii) If the holder of Option under the Plan ceases employment
because of permanent or total disability (within the meaning of Section 22(e)(3)
of the Code) while employed by the Company or a subsidiary corporation of the
Company, then such option may, subject to the provisions of subparagraph (iv) of
this paragraph (e), be exercised at any time within one year after his
termination of employment due to disability.
(iv) Except as otherwise determined by the Board, or if so
designated the Committee, an Option may not be exercised pursuant to this
Paragraph (e) except to the extent that the holder was entitled to exercise the
Option at the time of termination of employment, termination of Directorship, or
death, and in any event may not be exercised after the expiration of the Option.
For purpose of this Paragraph (e), the employment relationship of an employee of
the Company or of a subsidiary corporation of the company will be treated as
continuing intact while he is on military or sick leave or other bona fide leave
of absence (such as temporary employment by the Government) if such leave does
not exceed ninety (90) days, or, if longer, so long as his right to reemployment
is guaranteed either by statute or by contract.
(f) Nontransferability of Options. No option shall be transferable by a
-------------------------------
Holder otherwise than by will or the laws of descent and distribution, and
during the lifetime of the Employee to whom an option is granted it may be
exercised only by the employee, his guardian or legal representative if
permitted by Section 422 and related sections of the Code and any regulations
promulgated thereunder.
(g) Listing and Registration. Each option shall be subject to the
--------------------------
requirement that if at any time the Board, or if so designated the Committee,
shall determine, in its discretion, the listing, registration or qualification
of the Stock subject to such option upon any securities exchange or under any
state or federal law, or the consent or approval of any governmental regulatory
body, is necessary or desirable as a condition of, or in connection with, the
granting of such option or the issue or purchase of shares thereunder, no such
option may be exercised in whole or in part unless such listing, registration,
qualification, consent or approval shall have been effected or obtained free of
any conditions not acceptable to the Board, or if so designated the Committee.
(h) Option Agreement. Each Employee to whom an option is granted shall
----------------
enter into an agreement with the Corporation which shall contain such
provisions, consistent with the provisions of the Plan, as may be established by
the Board, or if so designated the Committee.
(i) Withholding. Prior to the delivery of certificates for shares of
-----------
Stock, the Corporation or a subsidiary shall have the right to require a payment
from an Employee to cover any applicable withholding or other employment taxes
due upon the exercise of an option.
6. STOCK APPRECIATION RIGHTS
The Board or Committee may grant stock appreciation rights (SARs) in
connection with all or any part of an option granted under the Plan, either
concurrently with the grant of the option or at any time thereafter, and may
also grant SARs independently of options.
4
<PAGE>
(a) SARs Granted in Connection with an Option. An SAR granted in
-----------------------------------------------
connection with an option entitles the optionee to exercise the SAR by
surrendering to the Company, unexercised, the underlying option. The optionee
receives in exchange from the Company an amount equal to the excess of (x) the
Fair Market Value on the date of surrender of the underlying option (y) the
exercise price of the Common Stock covered by the surrendered portion of the
option.
When an SAR is exercised, the underlying option, to the extent surrendered,
ceases to be exercisable, and the number of shares available for issuance under
the Plan is reduced correspondingly.
An SAR is exercisable only when and to the extent the underlying option is
exercisable and expires no later than the date on which the underlying option
expires. Notwithstanding the foregoing, neither an SAR nor a related option may
be exercised during the first six (6) months of its respective term: provided,
however, that this limitation will not apply if the optionee dies or is disabled
within such six (6) month period.
(b) Independent SARs. The Board or the Committee may grant SARs without
----------------
related options. Such an SAR will entitle the optionee to receive from the
company on exercise of the SAR an amount equal to the excess of (x) the fair
market value of the Common Stock covered by the exercised portion of the SAR, as
of the date of such exercise, over (y) the fair market value of the Common Stock
covered by the exercised portion of the SAR as of the date on which the SAR was
granted.
SARs shall be exercisable in whole or in part at such times as the Board or
the Committee shall specify in the optionee's SAR grant or agreement.
Notwithstanding the foregoing, an SAR may not be exercised during the first six
(6) months of its term: provided, however, that this limitation will not apply
if the optionee dies or is disabled within such six (6) month period.
(c) Payment on Exercise. The Company's obligations arising upon the
---------------------
exercise of an SAR may be paid in cash or Common Stock, or any combination of
the same, as the Board or the Committee may determine. Shares issued on the
exercise of an SAR are valued at their fair market value as of the date of
exercise.
(d) Limitation on Amount paid on SAR Exercise. The Board or the
-----------------------------------------------
Committee may in its discretion impose a limit on the amount to be paid on
exercise of an SAR. In the event such a limit is imposed on an SAR granted in
connection with an option, the limit win not restrict the exercisability of the
underlying option.
(e) Persons Subject to 16(b). An optionee subject to Section 16(b) of
--------------------------
the Securities Exchange Act of 1934, as amended, may only exercise an SAR during
the period beginning on the third and ending on the twelfth business day
following the Company's public release of quarterly or annual summary statements
of sales and earnings and in accordance with all other provisions of Section
16(b).
(f) Non-Transferability of SARs. An SAR is non-transferable by the
-----------------------------
optionee other than by will or the laws of descent and distribution, and is
exercisable during the optionee's lifetime only by the optionee, or, in the
event of death, by the optionee's estate or by a person who acquires the right
to exercise the option by bequest or inheritance.
5
<PAGE>
(g) Effect on Shares in Plan. When an SAR is exercised, the aggregate
--------------------------
number of shares of Common Stock available for issuance under the Plan will be
reduced by the number of underlying shares of Common Stock as to which the SAR
is exercised.
7. ADJUSTMENT OF AND CHANGES IN STOCK
In the event of a reorganization, recapitalization, stock split, stock
dividend, combination of shares, merger, consolidation, distribution of assets,
or any other changes in the corporate structure or shares of the Corporation,
the Board, or if so designated the Committee, shall make such adjustments as it
deems appropriate in the number and kind of shares and SARs authorized by the
Plan, in the number and kind of shares covered by the options granted and in the
exercise price of outstanding options and SARs.
8. MERGERS, SALES AND CHANGE OF CONTROL
In the case of (i) any merger, consolidation or combination of the
Corporation with or into another corporation (other than a merger, consolidation
or combination in which the Corporation is the continuing corporation and which
does not result in its outstanding stock being converted into or exchanged for
different securities, cash or other property, or any combination thereof) or a
sale of all or substantially all of the business or assets of the Corporation or
(ii) a Change in Control (as defined below) of the Corporation, each option or
SAR then outstanding for one year or more shall (unless the Board, or if so
designated the Committee, determines otherwise), receive upon exercise of such
option or SAR an amount equal to the excess of the Fair Market Value on the date
of such exercise of (a) the securities, cash or other property, or combination
thereof, receivable upon such merger, consolidation or combination in respect of
a share of Stock, in the cases covered by clause (i) above, or (b) the final
tender offer price in the case of a tender offer resulting in a Change in
Control or (c) the value of the Stock covered by the option or SAR as determined
by the Board, or if so designated the Committee, in the case of a Change in
Control by reason of any other event, over the exercise price of such option,
multiplied by the number of shares of Stock with respect to which such option or
SAR shall have been exercised provided that in each event the amount payable in
the case of an incentive stock option shall be limited to the maximum
permissible amount necessary to preserve the option incentive stock option
status. Such amount may be payable fully in cash, fully in one or more of the
kind or kinds or property payable in such merger, consolidation or combination,
or partly in cash and partly in one or more such kind or kinds of property, all
in the discretion of the Board or if so designated the Committee.
Any determination by the Board, or if so designated the Committee, made
pursuant to this Section 8 may be made as to all outstanding options and SARs or
only as to certain options and SARs specified by the Board, or if so designated
the Committee and any such determination shall be made (a) in cases covered by
clause (i) above, prior to the occurrence of such event, (b) in the event of a
tender or exchange offer, prior to the purchase of any Stock pursuant thereto by
the offeror and (c) in the case of a Change in Control by reason of any other
event, just prior to or as soon as practicable after such Change in Control.
6
<PAGE>
A "Change in Control" shall be deemed to have occurred if (a) any person,
or any two or more persons acting as a group, and all affiliates of such person
or persons, shall own beneficially 25% or more of the Stock outstanding, or (b)
if following (i) a tender or exchange offer for voting securities of the
Corporation, or (ii) a proxy contest for the election of directors of the
Corporation, the persons who were directors of the Corporation immediately
before the initiation of such event cease to constitute a majority of the Board
of Directors of the Corporation upon the completion of such tender or exchange
offer or proxy contest or within one year after such completion.
9. NO RIGHTS OF SHAREHOLDERS
Neither an Employee nor the Employee's legal representative shall be, or
have any of the rights and privileges of, a shareholder of the Corporation in
respect of any shares purchasable upon the exercise of any option, in whole or
in part, unless and until certificates for such shares shall have been issued.
10. PLAN AMENDMENTS
The plan may be amended by the Board, as it shall deem advisable or to
conform, to any change in any law or regulation applicable thereto; provided,
that the Board may not, without the authorization and approval of shareholders:
(i) increase the aggregate number of shares available for options except as
permitted by Section 7, (ii) change the requirement of Section 5(a) that option
grants be priced at Fair Market value, (iii) extend the maximum period during
which an option may be exercised, or (iv) change the Plan's eligibility
requirements.
11. TERM OF PLAN
The Plan shall become effective upon its approval by the Corporation
shareholders. No options or SARs shall be granted under the Plan after the date
which is ten years after the date on which the Plan was approved by the
Corporation shareholders.
7
<PAGE>
AMENDED AND RESTATED
EMPLOYEE STOCK OPTION PLAN
AMERICAN BINGO & GAMING CORP.
1995 EMPLOYEE STOCK OPTION PLAN
1. PURPOSE
The purpose of the 1995 Employee Stock Option Plan (the "Plan") is to
provide a method whereby selected key employees of American Bingo & Gaming Corp.
(the "Corporation"), may have the opportunity to invest in shares of Common
Stock (the "Stock") of the Corporation, thereby giving them a proprietary and
vested interest in the growth and performance of the Corporation, and in
general, generating an increased incentive to contribute to the Corporation's
future success and prosperity, thus enhancing the value of the Corporation for
the benefit of shareholders. Further, the Plan is designed to enhance the
Corporation's ability to attract and retain individuals of exceptional
managerial talent upon whom, in large measure, the sustained progress, growth,
and profitability of the Corporation depends.
2. ADMINISTRATION
The Plan shall be administered by the Corporation's Board of Directors
("the Board") or if so designated by resolution of the Board, by a Committee
composed of not less than three individuals ("Committee"). From time to time the
Board, or if so designated the Committee, may grant stock options ("Options") to
such eligible parties and for such number of shares as it in its sole discretion
may determine. A grant in any year to an eligible Employee, (as defined in
Section 3 below) shall neither guarantee nor preclude a grant to such Employee
in subsequent years. Subject to the provisions of the Plan, the Board, or if so
designated the Committee, shall be authorized to interpret the Plan, to
establish, amend and rescind any rules and regulations relating to the Plan, to
determine the terms and provisions of the Option Agreements described in Section
5(h) thereof to make all other determinations necessary or advisable for the
administration of the Plan. The Board, or if so designated the Committee, may
correct any defect, supply any omissions or reconcile any inconsistency in the
Plan or in any Option in the manner and to the extent it shall deem desirable.
The determinations of the Board, of if so designated the Committee, in the
administration of the Plan, as described herein, shall be final and conclusive.
The validity, construction, and effect of Plan and any rules and regulations
relating to the Plan shall be determined in accordance with the laws of the
State of Delaware.
3. ELIGIBILITY
The employees eligible to participate in the Plan (the "Employees") shall
consist of the Company's current management as well as any additional executive
officers who may be hired by the Company in the future. Nothing in the Plan or
in any agreement thereunder shall confer any right on an Employee to continue in
the employ of the Corporation or shall interfere in any way with the right of
the Corporation or its subsidiaries, as the case may be, to terminate his or her
employment at any time.
<PAGE>
4. SHARES SUBJECT TO THE PLAN
Subject to adjustment as provided in Section 7, an aggregate of 500,000
shares of Stock shall be available for issuance under the Plan. The shares of
Stock deliverable upon the exercise of Options may be made available from
authorized but unissued shares or shares reacquired by the Corporation,
including shares purchased in the open market or in private transactions. If any
Option granted under the Plan shall terminate for any reason without having been
exercised or settled in stock or in cash pursuant to related stock appreciation
rights, the shares subject to, but not delivered under, such Option shall be
available for other Options.
5. GRANT TERM AND CONDITIONS OF OPTIONS
The Board or if so designated the Committee, may from time to time after
consultation with management select employees to whom Options shall be granted.
The Options granted shall be "Incentive Stock Options" within the meaning of
Section 422 of the Internal Revenue Code, as amended (the "Code"), or
nonstatutory stock options whichever the Board, or if so designated the
Committee, shall determine, subject to the following terms and conditions:
(a) Price. The purchase price per share of Stock deliverable upon
-----
exercise of each Incentive Stock Option shall not be less than 100 percent of
the Fair Market Value of the Stock on the date such the Option is granted.
Provided, however, that if an Incentive Stock Option is issued to an individual
who owns, at the time of grant, more than ten percent (10%) of the total
combined voting power of all classes of the Company's Stock, the Exercise price
of such Option shall be at least 110% of the Fair Market Value of the Stock on
the date of grant. The Option price of shares subject to non-statutory Stock
Options shall be determined by the Board of Directors or Committee, in its
absolute discretion at the time of grant of such Option. For purposes of this
plan, Fair Market Value shall be the average of the closing Bid and Ask prices
for the Stock on the date in question.
(b) Payment. Options may be exercised only upon payment of the
-------
purchase price thereof in full. Such payment shall be made in such form of
consideration as the Board or Committee determines and may vary for each Option.
Payment may consist of cash, check, notes, delivery of shares of common stock
having a fair market value on the date of surrender equal to the aggregate
exercise price, or any combination of such methods or other means of payment
permitted under the Delaware General Corporation Law.
(c) Term of Options. The term during which each Option may be
-----------------
exercised shall be determined by the Board, or if so designated the Committee,
provided that (i) a nonstatutory Option shall not be exercisable in whole or in
part more than 10 years from the date it is granted except as provided in
paragraph (e), below, with respect to the death of the Employee, and (ii) an
Incentive Stock Option shall not be exercisable in whole or in part more than 10
years from the date it is granted. All rights to purchase Stock pursuant to an
Option shall, unless sooner terminated, expire at the date designated by the
Board or, if so designated the Committee.
2
<PAGE>
The Board, or if so designated the Committee, shall determine the date
on which each Option shall become exercisable and may provide that an Option
shall become exercisable in installments. The shares comprising each installment
may be purchased in whole or in part at any time after such installment becomes
purchasable, except that the exercise of Incentive Stock Options shall be
further restricted as set forth herein. The Board, or if so designated the
Committee, may in its sole discretion, accelerate the time at which any Option
may be exercised in whole or in part, provided that unless otherwise determined
by the Board, or if so designated the Committee, no Option shall be exercisable
until one year after grant.
(d) Limitations on Grants. For Incentive Stock Options, the aggregate
----------------------
Fair Market Value (determined at the time the Option is granted) of the stock
with respect to which the Investment Stock Option is exercisable for the first
time by an Optionee during any calendar year (under all plans of the Company and
its parent or any subsidiary of the Corporation) shall not exceed $100,000. The
foregoing limitations shall be modified from time to time to reflect any changes
in Section 422 of the Code and any regulations promulgated thereunder setting
forth such limitations.
(e) Termination of Employment.
---------------------------
(i) If the employment of an Employee by the Company or a
subsidiary corporation of the Company shall be terminated voluntarily by the
Employee or for cause by the Company, then his or her Option shall expire
forthwith unless otherwise determined by the Board, or if so designated the
Committee. Except as provided in subparagraphs (ii) and (iii) of this Paragraph
(e), if such employment shall terminate for any other reason, unless otherwise
determined by the Board, or if so designated the Committee, then such Option may
be exercised at any time within three (3) months after such termination, subject
to the provisions of subparagraph (iv) of this Paragraph (e). For purposes of
this subparagraph, an employee who leaves the employ of the Company to become an
employee of a subsidiary corporation of the Company or a corporation (or
subsidiary or parent corporation of the corporation) which has assumed the
Option of the Company as a result of a corporate reorganization, etc., shall not
be considered to have terminated his or her employment.
(ii) If the holder of an Option under the Plan dies (a) while
employed by, or while serving as a non-employee Director for, the Company or a
subsidiary corporation of the Company, or (b) within three (3) months after the
termination of his employment or services other than voluntarily by the
Employee, or for cause, then such Option may, subject to the provisions of
subparagraph (iv) of this Paragraph (e), be exercised by the estate of the
Employee or by a person who acquired the right to exercise such Option by
bequest or inheritance or by reason of the death of such Employee at any time
within one (1) year after such death.
(iii) If the holder of the Option under the Plan ceases
employment because of permanent or total disability (within the meaning of
Section 22 (e) (3) of the Code) while employed by the Company or a subsidiary
corporation of the Company, then such Option may, subject to the provisions of
subparagraph (iv) of this paragraph (e), be exercised at any time within one
year after his termination of employment due to disability.
3
<PAGE>
(iv) Except as otherwise determined by the Board, or if so
designated the Committee, an Option may not be exercised pursuant to this
Paragraph (e) except to the extent that the holder was entitled to exercise the
Option at the time of termination of employment, or death, and in any event may
not be exercised after the expiration of the Option. For purpose of this
Paragraph (e), the employment relationship of an employee of the Company or of a
subsidiary corporation of the company will be treated as continuing intact while
he or she is on military or sick leave or other bona fide leave of absence (such
as temporary employment by the Government) if such leave does not exceed ninety
(90) days, or, if longer, so long as his or her right to reemployment is
guaranteed either by statute or by contract.
(f) Nontransferability of Options. No Option shall be transferable by
------------------------------
a Holder otherwise than by will or the laws of descent and distribution, and
during the lifetime of the Employee to whom an Option is granted, it may be
exercised only by the employee, his guardian or legal representative if
permitted by Section 422 and related sections of the Code and any regulations
promulgated thereunder.
(g) Listing and Registration. Each Option shall be subject to the
--------------------------
requirement that if at any time the Board, or if so designated the Committee,
shall determine, in its discretion, the listing, registration or qualification
of the Stock subject to such Option upon any securities exchange or under any
state or federal law, or the consent or approval of any governmental regulatory
body, is necessary or desirable as a condition of, or in connection with, the
granting of such Option or the issue or purchase of shares thereunder, no such
Option may be exercised in whole or in part unless such listing, registration,
qualification, consent or approval shall have been effected or obtained free of
any conditions not acceptable to the Board, or if so designated the Committee.
(h) Option Agreement. Each Employee to whom an Option is granted shall
----------------
enter into an agreement with the Corporation which shall contain such
provisions, consistent with the provisions of the Plan, as may be established by
the Board, or if so designated the Committee.
(i) Withholding. Prior to the delivery of certificates for shares of
-----------
Stock, the Corporation or a subsidiary shall have the right to require a payment
from an Employee to cover any applicable withholding or other employment taxes
due upon the exercise of an Option.
6. STOCK APPRECIATION RIGHTS
The Board or Committee may grant stock appreciation rights (SARs) in
connection with all or any part of an Option granted under the Plan, either
concurrently with the grant of the Option or at any time thereafter, and may
also grant SARs independently of Options.
(a) SARs Granted in Connection with an Option. An SAR granted in
-----------------------------------------------
connection with an Option entitles the Optionee to exercise the SAR by
surrendering to the Company, unexercised, the underlying Option. The Optionee
receives in exchange from the Company an amount equal to the excess of (x) the
Fair Market Value on the date of surrender of the underlying Option over (y) the
exercise price of the Common Stock covered by the surrendered portion of the
Option.
4
<PAGE>
When an SAR is exercised, the underlying Option, to the extent
surrendered, ceases to be exercisable, and the number of shares available for
issuance under the Plan is reduced correspondingly.
An SAR is exercisable only when and to the extent the underlying Option is
exercisable and expires no later than the date on which the underlying Option
expires. Notwithstanding the foregoing, neither an SAR nor a related Option may
be exercised during the first six (6) months of its respective term: provided,
however, that this limitation will not apply if the Optionee dies or is disabled
within such six (6) month period.
(b) Independent SARs. The Board or the Committee may grant SARs
-----------------
without related Options. Such an SAR will entitle the Optionee to receive from
the Company on exercise of the SAR an amount equal to the excess of (x) the fair
market value of the Common Stock covered by the exercised portion of the SAR, as
of the date of such exercise, over (y) the fair market value of the Common Stock
covered by the exercised portion of the SAR as of the date on which the SAR was
granted.
SARs shall be exercisable in whole or in part at such times as the Board or
the Committee shall specify in the Optionee's SAR grant or agreement.
Notwithstanding the foregoing, an SAR may not be exercised during the first six
(6) months of its term: provided, however, that this limitation will not apply
if the Optionee dies or is disabled within such six (6) month period.
(c) Payment on Exercise. The Company's obligations arising upon the
---------------------
exercise of an SAR may be paid in cash or Common Stock, or any combination of
the same, as the Board or the Committee may determine. Shares issued on the
exercise of an SAR are valued at their fair market value as of the date of
exercise.
(d) Limitation on Amount Paid on SAR Exercise. The Board or the
-----------------------------------------------
Committee may in its discretion impose a limit on the amount to be paid on
exercise of an SAR. In the event such a limit is imposed on an SAR granted in
connection with an Option, the limit will not restrict the exercisability of the
underlying Option.
(e) Persons Subject to 16(b). An Optionee subject to Section 16(b) of
-------------------------
the Securities Exchange Act of 1934, as amended, may only exercise an SAR during
the period beginning on the third and ending on the twelfth business day
following the Company's public release of quarterly or annual summary statements
of sales and earnings and in accordance with all other provisions of Section
16(b).
(f) Non-Transferability of SARs. An SAR is non-transferable by the
-----------------------------
Optionee other than by will or the laws of descent and distribution, and is
exercisable during the Optionee's lifetime only by the Optionee, or, in the
event of death, by the Optionee's estate or by a person who acquires the right
to exercise the Option by bequest or inheritance.
(g) Effect on Shares in Plan. When an SAR is exercised, the aggregate
-------------------------
number of shares of Common Stock available for issuance under the Plan will be
reduced by the number of underlying shares of Common Stock as to which the SAR
is exercised.
5
<PAGE>
7. ADJUSTMENT OF AND CHANGES IN STOCK
In the event of a reorganization, recapitalization, stock split, stock
dividend, combination of shares, merger, consolidation, distribution of assets,
or any other changes in the corporate structure or shares of the Corporation,
the Board, or if so designated the Committee, shall make such adjustments as it
deems appropriate in the number and kind of shares and SARs authorized by the
Plan, in the number and kind of shares covered by the Options granted and in the
exercise price of outstanding Options and SARs.
8. MERGERS, SALES AND CHANGE OF CONTROL
In the case of (i) any merger, consolidation or combination of the
Corporation with or into another corporation (other than a merger, consolidation
or combination in which the Corporation is the continuing corporation and which
does not result in its outstanding stock being converted into or exchanged for
different securities, cash or other property, or any combination thereof) or a
sale of all or substantially all of the business or assets of the Corporation or
(ii) a Change in Control (as defined below) of the Corporation, each Option or
SAR then outstanding for one year or more shall (unless the Board, or if so
designated the Committee, determines otherwise), receive upon exercise of such
Option or SAR an amount equal to the excess of the Fair Market Value on the date
of such exercise of (a) the securities, cash or other property, or combination
thereof, receivable upon such merger, consolidation or combination in respect of
a share of Stock, in the cases covered by clause (i) above, or (b) the final
tender offer price in the case of a tender offer resulting in a Change in
Control or (c) the value of the Stock covered by the Option or SAR as determined
by the Board, or if so designated the Committee, in the case of a Change in
Control by reason of any other event, over the exercise price of such Option,
multiplied by the number of shares of Stock with respect to which such Option or
SAR shall have been exercised provided that in each event the amount payable in
the case of an incentive stock Option shall be limited to the maximum
permissible amount necessary to preserve the Option incentive stock Option
status. Such amount may be payable fully in cash, fully in one or more of the
kind or kinds or property payable in such merger, consolidation or combination,
or partly in cash and partly in one or more such kind or kinds of property, all
in the discretion of the Board or if so designated the Committee.
Any determination by the Board, or if so designated the Committee, made
pursuant to this Section 8 may be made as to all outstanding Options and SARs or
only as to certain Options and SARs specified by the Board, or if so designated
the Committee and any such determination shall be made (a) in cases covered by
clause (i) above, prior to the occurrence of such event, (b) in the event of a
tender or exchange offer, prior to the purchase of any Stock pursuant thereto by
the offeror and (c) in the case of a Change in Control by reason of any other
event, just prior to or as soon as practicable after such Change in Control.
A "Change in Control" shall be deemed to have occurred if (a) any person,
or any two or more persons acting as a group, and all affiliates of such person
or persons, shall own beneficially 25% or more of the Stock outstanding, or (b)
if following (i) a tender or exchange offer for voting securities of the
Corporation, or (ii) a proxy contest for the election of directors of the
Corporation, the persons who were directors of the Corporation immediately
before the initiation of such event cease to constitute a majority of the Board
of Directors of the Corporation upon the completion of such tender or exchange
offer or proxy contest or within one year after such completion.
6
<PAGE>
9. NO RIGHTS OF SHAREHOLDERS
Neither an Employee nor the Employee's legal representative shall be, or
have any of the rights and privileges of, a shareholder of the Corporation in
respect of any shares purchasable upon the exercise of any Option, in whole or
in part, unless and until certificates for such shares shall have been issued.
10. PLAN AMENDMENTS
The plan may be amended by the Board, as it shall deem advisable or to
conform, to any change in any law or regulation applicable thereto; provided,
that the Board may not, without the authorization and approval of shareholders:
(i) increase the aggregate number of shares available for Options except as
permitted by Section 7, (ii) change the requirement of Section 5(a) that Option
grants be priced at Fair Market value, (iii) extend the maximum period during
which an Option may be exercised, or (iv) change the Plan's eligibility
requirements.
11. TERM OF PLAN
The Plan shall become effective upon its approval by the Corporation
shareholders. No Options or SARs shall be granted under the Plan after the date
which is ten years after the date on which the Plan was approved by the
Corporation shareholders.
7
<PAGE>
AMENDED AND RESTATED
EMPLOYEE STOCK OPTION PLAN
AMERICAN BINGO & GAMING CORP.
1996 EMPLOYEE STOCK OPTION PLAN
1. PURPOSE
The purpose of the 1996 Employee Stock Option Plan (the "Plan") is to
provide a method whereby selected key employees of American Bingo & Gaming Corp.
(the "Corporation"), may have the opportunity to invest in shares of Common
Stock (the "Stock") of the Corporation, thereby giving them a proprietary and
vested interest in the growth and performance of the Corporation, and in
general, generating an increased incentive to contribute to the Corporation's
future success and prosperity, thus enhancing the value of the Corporation for
the benefit of shareholders. Further, the Plan is designed to enhance the
Corporation's ability to attract and retain individuals of exceptional
managerial talent upon whom, in large measure, the sustained progress, growth,
and profitability of the Corporation depends.
2. ADMINISTRATION
The Plan shall be administered by the Corporation's Board of Directors
("the Board") or if so designated by resolution of the Board, by a Committee
composed of not less than three individuals ("Committee"). From time to time the
Board, or if so designated the Committee, may grant stock options ("Options") to
such eligible parties and for such number of shares as it in its sole discretion
may determine. A grant in any year to an eligible Employee, (as defined in
Section 3 below) shall neither guarantee nor preclude a grant to such Employee
in subsequent years. Subject to the provisions of the Plan, the Board, or if so
designated the Committee, shall be authorized to interpret the Plan, to
establish, amend and rescind any rules and regulations relating to the Plan, to
determine the terms and provisions of the Option Agreements described in Section
5(h) thereof to make all other determinations necessary or advisable for the
administration of the Plan. The Board, or if so designated the Committee, may
correct any defect, supply any omissions or reconcile any inconsistency in the
Plan or in any Option in the manner and to the extent it shall deem desirable.
The determinations of the Board, of if so designated the Committee, in the
administration of the Plan, as described herein, shall be final and conclusive.
The validity, construction, and effect of Plan and any rules and regulations
relating to the Plan shall be determined in accordance with the laws of the
State of Delaware.
3. ELIGIBILITY
The employees eligible to participate in the Plan (the "Employees") shall
consist of the Company's current management as well as any additional executive
officers who may be hired by the Company in the future. Nothing in the Plan or
in any agreement thereunder shall confer any right on an Employee to continue in
the employ of the Corporation or shall interfere in any way with the right of
the Corporation or its subsidiaries, as the case may be, to terminate his or her
employment at any time.
<PAGE>
4. SHARES SUBJECT TO THE PLAN
Subject to adjustment as provided in Section 7, an aggregate of 500,000
shares of Stock shall be available for issuance under the Plan. The shares of
Stock deliverable upon the exercise of Options may be made available from
authorized but unissued shares or shares reacquired by the Corporation,
including shares purchased in the open market or in private transactions. If any
Option granted under the Plan shall terminate for any reason without having been
exercised or settled in stock or in cash pursuant to related stock appreciation
rights, the shares subject to, but not delivered under, such Option shall be
available for other Options.
5. GRANT TERM AND CONDITIONS OF OPTIONS
The Board or if so designated the Committee, may from time to time after
consultation with management select employees to whom Options shall be granted.
The Options granted shall be "Incentive Stock Options" within the meaning of
Section 422 of the Internal Revenue Code, as amended (the "Code"), or
nonstatutory stock options whichever the Board, or if so designated the
Committee, shall determine, subject to the following terms and conditions:
(a) Price. The purchase price per share of Stock deliverable upon
-----
exercise of each Incentive Stock Option shall not be less than 100 percent of
the Fair Market Value of the Stock on the date such the Option is granted.
Provided, however, that if an Incentive Stock Option is issued to an individual
who owns, at the time of grant, more than ten percent (10%) of the total
combined voting power of all classes of the Company's Stock, the Exercise price
of such Option shall be at least 110% of the Fair Market Value of the Stock on
the date of grant. The Option price of shares subject to non-statutory Stock
Options shall be determined by the Board of Directors or Committee, in its
absolute discretion at the time of grant of such Option. For purposes of this
plan, Fair Market Value shall be the average of the closing Bid and Ask prices
for the Stock on the date in question.
(b) Payment. Options may be exercised only upon payment of the
-------
purchase price thereof in full. Such payment shall be made in such form of
consideration as the Board or Committee determines and may vary for each Option.
Payment may consist of cash, check, notes, delivery of shares of common stock
having a fair market value on the date of surrender equal to the aggregate
exercise price, or any combination of such methods or other means of payment
permitted under the Delaware General Corporation Law.
(c) Term of Options. The term during which each Option may be
-----------------
exercised shall be determined by the Board, or if so designated the Committee,
provided that (i) a nonstatutory Option shall not be exercisable in whole or in
part more than 10 years from the date it is granted except as provided in
paragraph (e), below, with respect to the death of the Employee, and (ii) an
Incentive Stock Option shall not be exercisable in whole or in part more than 10
years from the date it is granted. All rights to purchase Stock pursuant to an
Option shall, unless sooner terminated, expire at the date designated by the
Board or, if so designated the Committee.
2
<PAGE>
The Board, or if so designated the Committee, shall determine the
date on which each Option shall become exercisable and may provide that an
Option shall become exercisable in installments. The shares comprising each
installment may be purchased in whole or in part at any time after such
installment becomes purchasable, except that the exercise of Incentive Stock
Options shall be further restricted as set forth herein. The Board, or if so
designated the Committee, may in its sole discretion, accelerate the time at
which any Option may be exercised in whole or in part, provided that unless
otherwise determined by the Board, or if so designated the Committee, no Option
shall be exercisable until one year after grant.
(d) Limitations on Grants. For Incentive Stock Options, the aggregate
----------------------
Fair Market Value (determined at the time the Option is granted) of the stock
with respect to which the Investment Stock Option is exercisable for the first
time by an Optionee during any calendar year (under all plans of the Company and
its parent or any subsidiary of the Corporation) shall not exceed $100,000. The
foregoing limitations shall be modified from time to time to reflect any changes
in Section 422 of the Code and any regulations promulgated thereunder setting
forth such limitations.
(e) Termination of Employment.
---------------------------
(i) If the employment of an Employee by the Company or a
subsidiary corporation of the Company shall be terminated voluntarily by the
Employee or for cause by the Company, then his or her Option shall expire
forthwith unless otherwise determined by the Board, or if so designated the
Committee. Except as provided in subparagraphs (ii) and (iii) of this Paragraph
(e), if such employment shall terminate for any other reason, unless otherwise
determined by the Board, or if so designated the Committee, then such Option may
be exercised at any time within three (3) months after such termination, subject
to the provisions of subparagraph (iv) of this Paragraph (e). For purposes of
this subparagraph, an employee who leaves the employ of the Company to become an
employee of a subsidiary corporation of the Company or a corporation (or
subsidiary or parent corporation of the corporation) which has assumed the
Option of the Company as a result of a corporate reorganization, etc., shall not
be considered to have terminated his or her employment.
(ii) If the holder of an Option under the Plan dies (a) while
employed by, or while serving as a non-employee Director for, the Company or a
subsidiary corporation of the Company, or (b) within three (3) months after the
termination of his employment or services other than voluntarily by the
Employee, or for cause, then such Option may, subject to the provisions of
subparagraph (iv) of this Paragraph (e), be exercised by the estate of the
Employee or by a person who acquired the right to exercise such Option by
bequest or inheritance or by reason of the death of such Employee at any time
within one (1) year after such death.
(iii) If the holder of the Option under the Plan ceases employment
because of permanent or total disability (within the meaning of Section 22 (e)
(3) of the Code) while employed by the Company or a subsidiary corporation of
the Company, then such Option may, subject to the provisions of subparagraph
(iv) of this paragraph (e), be exercised at any time within one year after his
termination of employment due to disability.
3
<PAGE>
(iv) Except as otherwise determined by the Board, or if so
designated the Committee, an Option may not be exercised pursuant to this
Paragraph (e) except to the extent that the holder was entitled to exercise the
Option at the time of termination of employment, or death, and in any event may
not be exercised after the expiration of the Option. For purpose of this
Paragraph (e), the employment relationship of an employee of the Company or of a
subsidiary corporation of the company will be treated as continuing intact while
he or she is on military or sick leave or other bona fide leave of absence (such
as temporary employment by the Government) if such leave does not exceed ninety
(90) days, or, if longer, so long as his or her right to reemployment is
guaranteed either by statute or by contract.
(f) Nontransferability of Options. No Option shall be transferable by
------------------------------
a Holder otherwise than by will or the laws of descent and distribution, and
during the lifetime of the Employee to whom an Option is granted, it may be
exercised only by the employee, his guardian or legal representative if
permitted by Section 422 and related sections of the Code and any regulations
promulgated thereunder.
(g) Listing and Registration. Each Option shall be subject to the
--------------------------
requirement that if at any time the Board, or if so designated the Committee,
shall determine, in its discretion, the listing, registration or qualification
of the Stock subject to such Option upon any securities exchange or under any
state or federal law, or the consent or approval of any governmental regulatory
body, is necessary or desirable as a condition of, or in connection with, the
granting of such Option or the issue or purchase of shares thereunder, no such
Option may be exercised in whole or in part unless such listing, registration,
qualification, consent or approval shall have been effected or obtained free of
any conditions not acceptable to the Board, or if so designated the Committee.
(h) Option Agreement. Each Employee to whom an Option is granted shall
----------------
enter into an agreement with the Corporation which shall contain such
provisions, consistent with the provisions of the Plan, as may be established by
the Board, or if so designated the Committee.
(i) Withholding. Prior to the delivery of certificates for shares of
-----------
Stock, the Corporation or a subsidiary shall have the right to require a payment
from an Employee to cover any applicable withholding or other employment taxes
due upon the exercise of an Option.
6. STOCK APPRECIATION RIGHTS
The Board or Committee may grant stock appreciation rights (SARs) in
connection with all or any part of an Option granted under the Plan, either
concurrently with the grant of the Option or at any time thereafter, and may
also grant SARs independently of Options.
(a) SARs Granted in Connection with an Option. An SAR granted in
-----------------------------------------------
connection with an Option entitles the Optionee to exercise the SAR by
surrendering to the Company, unexercised, the underlying Option. The Optionee
receives in exchange from the Company an amount equal to the excess of (x) the
Fair Market Value on the date of surrender of the underlying Option over (y) the
exercise price of the Common Stock covered by the surrendered portion of the
Option.
4
<PAGE>
When an SAR is exercised, the underlying Option, to the extent surrendered,
ceases to be exercisable, and the number of shares available for issuance under
the Plan is reduced correspondingly.
An SAR is exercisable only when and to the extent the underlying Option is
exercisable and expires no later than the date on which the underlying Option
expires. Notwithstanding the foregoing, neither an SAR nor a related Option may
be exercised during the first six (6) months of its respective term: provided,
however, that this limitation will not apply if the Optionee dies or is disabled
within such six (6) month period.
(b) Independent SARs. The Board or the Committee may grant SARs
-----------------
without related Options. Such an SAR will entitle the Optionee to receive from
the Company on exercise of the SAR an amount equal to the excess of (x) the fair
market value of the Common Stock covered by the exercised portion of the SAR, as
of the date of such exercise, over (y) the fair market value of the Common Stock
covered by the exercised portion of the SAR as of the date on which the SAR was
granted.
SARs shall be exercisable in whole or in part at such times as the Board or
the Committee shall specify in the Optionee's SAR grant or agreement.
Notwithstanding the foregoing, an SAR may not be exercised during the first six
(6) months of its term: provided, however, that this limitation will not apply
if the Optionee dies or is disabled within such six (6) month period.
(c) Payment on Exercise. The Company's obligations arising upon the
---------------------
exercise of an SAR may be paid in cash or Common Stock, or any combination of
the same, as the Board or the Committee may determine. Shares issued on the
exercise of an SAR are valued at their fair market value as of the date of
exercise.
(d) Limitation on Amount paid on SAR Exercise. The Board or the
-----------------------------------------------
Committee may in its discretion impose a limit on the amount to be paid on
exercise of an SAR. In the event such a limit is imposed on an SAR granted in
connection with an Option, the limit will not restrict the exercisability of the
underlying Option.
(e) Persons Subject to 16(b). An Optionee subject to Section 16(b) of
-------------------------
the Securities Exchange Act of 1934, as amended, may only exercise an SAR during
the period beginning on the third and ending on the twelfth business day
following the Company's public release of quarterly or annual summary statements
of sales and earnings and in accordance with all other provisions of Section
16(b).
(f) Non-Transferability of SARs. An SAR is non-transferable by the
-----------------------------
Optionee other than by will or the laws of descent and distribution, and is
exercisable during the Optionee's lifetime only by the Optionee, or, in the
event of death, by the Optionee's estate or by a person who acquires the right
to exercise the Option by bequest or inheritance.
(g) Effect on Shares in Plan. When an SAR is exercised the aggregate
--------------------------
number of shares of Common Stock available for issuance under the Plan will be
reduced by the number of underlying shares of Common Stock as to which the SAR
is exercised.
5
<PAGE>
7. ADJUSTMENT OF AND CHANGES IN STOCK
In the event of a reorganization, recapitalization, stock split, stock
dividend, combination of shares, merger, consolidation, distribution of assets,
or any other changes in the corporate structure or shares of the Corporation,
the Board, or if so designated the Committee, shall make such adjustments as it
deems appropriate in the number and kind of shares and SARs authorized by the
Plan, in the number and kind of shares covered by the Options granted and in the
exercise price of outstanding Options and SARs.
8. MERGERS, SALES AND CHANGE OF CONTROL
In the case of (i) any merger, consolidation or combination of the
Corporation with or into another corporation (other than a merger, consolidation
or combination in which the Corporation is the continuing corporation and which
does not result in its outstanding stock being converted into or exchanged for
different securities, cash or other property, or any combination thereof) or a
sale of all or substantially all of the business or assets of the Corporation or
(ii) a Change in Control (as defined below) of the Corporation, each Option or
SAR then outstanding for one year or more shall (unless the Board, or if so
designated the Committee, determines otherwise), receive upon exercise of such
Option or SAR an amount equal to the excess of the Fair Market Value on the date
of such exercise of (a) the securities, cash or other property, or combination
thereof, receivable upon such merger, consolidation or combination in respect of
a share of Stock, in the cases covered by clause (i) above, or (b) the final
tender offer price in the case of a tender offer resulting in a Change in
Control or (c) the value of the Stock covered by the Option or SAR as determined
by the Board, or if so designated the Committee, in the case of a Change in
Control by reason of any other event, over the exercise price of such Option,
multiplied by the number of shares of Stock with respect to which such Option or
SAR shall have been exercised provided that in each event the amount payable in
the case of an incentive stock Option shall be limited to the maximum
permissible amount necessary to preserve the Option incentive stock Option
status. Such amount may be payable fully in cash, fully in one or more of the
kind or kinds or property payable in such merger, consolidation or combination,
or partly in cash and partly in one or more such kind or kinds of property, all
in the discretion of the Board or if so designated the Committee.
Any determination by the Board, or if so designated the Committee, made
pursuant to this Section 8 may be made as to all outstanding Options and SARs or
only as to certain Options and SARs specified by the Board, or if so designated
the Committee and any such determination shall be made (a) in cases covered by
clause (i) above, prior to the occurrence of such event, (b) in the event of a
tender or exchange offer, prior to the purchase of any Stock pursuant thereto by
the offeror and (c) in the case of a Change in Control by reason of any other
event, just prior to or as soon as practicable after such Change in Control.
A "Change in Control" shall be deemed to have occurred if (a) any person,
or any two or more persons acting as a group, and all affiliates of such person
or persons, shall own beneficially 25% or more of the Stock outstanding, or (b)
if following (i) a tender or exchange offer for voting securities of the
Corporation, or (ii) a proxy contest for the election of directors of the
Corporation, the persons who were directors of the Corporation immediately
before the initiation of such event cease to constitute a majority of the Board
of Directors of the Corporation upon the completion of such tender or exchange
offer or proxy contest or within one year after such completion.
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<PAGE>
9. NO RIGHTS OF SHAREHOLDERS
Neither an Employee nor the Employee's legal representative shall be, or
have any of the rights and privileges of, a shareholder of the Corporation in
respect of any shares purchasable upon the exercise of any Option, in whole or
in part, unless and until certificates for such shares shall have been issued.
10. PLAN AMENDMENTS
The plan may be amended by the Board, as it shall deem advisable or to
conform, to any change in any law or regulation applicable thereto; provided,
that the Board may not, without the authorization and approval of shareholders:
(i) increase the aggregate number of shares available for Options except as
permitted by Section 7, (ii) change the requirement of Section 5(a) that Option
grants be priced at Fair Market value, (iii) extend the maximum period during
which an Option may be exercised, or (iv) change the Plan's eligibility
requirements.
11. TERM OF PLAN
The Plan shall become effective upon its approval by the Corporation
shareholders. No Options or SARs shall be granted under the Plan after the date
which is ten years after the date on which the Plan was approved by the
Corporation shareholders.
7
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (this "Agreement") is executed as of this 19th
----
day of June, 1998 (the "Effective Date"), by and between AMERICAN BINGO & GAMING
CORP., a Delaware corporation (the "Company"), and RICHARD M. KELLEY (the
"Executive").
WHEREAS, the parties wish to enter into an employment agreement to employ
the Executive as its Vice President and Chief Financial Officer and to set forth
certain additional agreements between the Executive and the Company;
NOW, THEREFORE, in consideration of the mutual covenants and
representations contained herein, the parties hereto agree as follows:
1. TERM
----
The Company will employ the Executive, and the Executive will serve the
Company, under the terms of this Agreement, for an initial term of two years
commencing on June 29, 1998 (the "Employment Date"). The terms of this
Agreement may be extended for one or more additional twelve-month periods
provided the Company and the Executive agree in writing to such an extension no
later than thirty days prior to the expiration of the term of this Agreement.
Notwithstanding the foregoing, the Executive's employment hereunder may be
earlier terminated as provided in Section 4 hereof. The term of this Agreement,
as in effect from time to time in accordance with the foregoing, shall be
referred to herein as the "Term." The period of time between the Employment
Date and the termination of the Executive's employment hereunder shall be
referred to herein as the "Employment Period."
2. EMPLOYMENT
----------
(a) POSITIONS AND REPORTING. The Company hereby employs the
Executive for the Employment Period as its Vice President and Chief Financial
Officer on the terms and conditions set forth in this Agreement.
(b) AUTHORITY AND DUTIES. The Executive shall exercise such
authority, perform such executive duties and functions and discharge such
responsibilities as the President of the Company may from time to time
determine, consistent with the Executive's position and the By-Laws of the
Company. Without limiting the generality of the foregoing, the Executive shall
report directly and be responsible to the President of the Company. During the
Employment Period, the Executive shall devote his full business time, skill and
efforts to the business of the Company. Notwithstanding the foregoing, the
Executive may (i) make and manage passive personal business investments of his
choice (in the case of publicly held corporations, not to exceed 2% of the
outstanding voting stock) and serve in any capacity with any civic, educational
or charitable organization, or any trade association, without seeking or
obtaining approval from the President of the Company, provided such activities
and service do not materially interfere or conflict with the performance of his
duties hereunder, and (ii) with the approval of the President, serve on the
boards of directors of other corporations.
<PAGE>
(c) PRIOR EMPLOYMENT. The Executive represents and warrants
that he has no individual employment agreement or non-competition agreement with
his current or any prior employer or any other agreement, contract, judgment,
decree or limitation which would prohibit, limit or otherwise restrict the
employment of the Executive by the Company pursuant to the terms of this
Agreement.
3. COMPENSATION AND BENEFITS
---------------------------
(a) SALARY. During the Employment Period, the Company shall
pay to the Executive, as compensation for the performance of his duties and
obligations under this Agreement, a base salary at the rate of One Hundred Forty
Thousand ($140,000) Dollars per annum, payable in arrears not less frequently
than monthly in accordance with the normal payroll practices of the Company.
Such base salary shall be subject to review each year for a possible increase,
but shall in no event be decreased from its then-existing level during the
Employment Period. The Executive may also be requested to serve as a director
or officer of various subsidiaries and affiliates of the Company and he hereby
agrees to fulfill his duties as such an officer and a director of such entities
without additional compensation.
(b) ANNUAL BONUS. During the Employment Period, the
Executive shall have the opportunity to earn an annual discretionary bonus of up
to Fifty Thousand ($50,000) Dollars per annum. The Executive and the Company
acknowledge that an incentive program which will serve as the basis for
determining the Executive's annual bonus has not yet been established and hereby
agree to establish such program as soon as possible following the Employment
Date. The Executive acknowledges that this annual discretionary bonus shall be
terminated upon the establishment and adoption of an annual incentive program by
the Company which may be similar or greater in value. Until such incentive
program is established, the Executive's bonus opportunity shall be discretionary
and shall be comparable to or greater than awards granted to other executive
officers of the Company.
(c) EQUITY PARTICIPATION. The Executive shall be entitled to
receive awards under any stock option or equity based incentive compensation
plan or arrangement adopted by the Company for which senior executives are
eligible. The level of the Executive's future participation in any such plan or
arrangement shall be determined by the Board of Directors and shall be
comparable to other executive officers of the Company.
(d) OTHER BENEFITS. During the Employment Period, the
Executive shall be entitled to participate in the Company's group health
insurance plan, dental plan, group life insurance plan, long-term disability
insurance plan, employee stock purchase plan, profit sharing plan, SARSEP and
all of the other employee benefit plans, programs and arrangements of the
Company in effect during the Employment Period which are generally available to
senior executives of the Company, subject to and on a basis consistent with the
terms, conditions and overall administration of such plans, programs and
arrangements. In addition, during the Employment Period, the Executive shall be
entitled to fringe benefits and perquisites comparable to those of other senior
executives of the Company, including, but not limited to, three weeks of paid
vacation per year and reasonable professional membership license fees and
expenses.
2
<PAGE>
(e) MOVING EXPENSES. The Company shall pay or reimburse the
Executive for the direct and reasonable expenses incurred in connection with
relocating the Executive and his immediate family to Columbia, South Carolina;
provided, however, such moving expenses shall not exceed $20,000. In addition,
during the transition period, the Company shall pay up to six months of full
furnished housing expenses for the Executive and shall pay for the Executive's
reasonable temporary ground transportation expenses or, at the determination of
the Company's President, shall pay for the Executive's vehicles to be
transported to South Carolina. It is the intent of this Section 3(e) that the
Executive shall not incur any out-of-pocket expenses related to his relocation
to Columbia, South Carolina.
(f) BUSINESS EXPENSES. During the Employment Period, the
Company shall pay directly or reimburse the Executive for all documented
reasonable business expenses incurred by the Executive in the performance of his
duties under this Agreement, in accordance with the Company's policies.
(g) VEHICLE ALLOWANCE. The Company shall provide the Executive
a vehicle allowance in the amount of Three Hundred ($300) Dollars per month.
(h) INDEMNIFICATION. During the Employment Period and
thereafter,the Company shall indemnify the Executive to the fullest extent
permitted by applicable law, and the Executive shall be entitled to the
protection of insurance policies the Company may elect to maintain generally
for the benefit of its officers, with respect to all costs, charges and
expenses whatsoever incurred or sustained by the Executive in connection with
any action, suit or proceeding to which he may be made a party by reason of
being or having been an officer or employee of the Company or having served
any other enterprise as a director, officer or employee at the request of the
Company. The Company shall maintain director and officer insurance at
reasonable and customary levels.
4. TERMINATION OF EMPLOYMENT
---------------------------
(a) TERMINATION FOR CAUSE. The Company may immediately
terminate the Executive's employment hereunder for "cause" upon written notice
to the Executive. For purposes of this Agreement, the Company shall have
"cause" to terminate the Executive's employment hereunder if such termination
shall be the result of:
(i) willful, material fraud or material dishonesty in
connection with the Executive's performance hereunder that results in harm to
the Company;
(ii) the failure by the Executive to substantially
perform his material duties hereunder in good faith that results in material
harm to the Company, if the Executive has been provided an opportunity to cure
as provided in Section 4(c) of this Agreement;
3
<PAGE>
(iii) the Executive's material breach of this Agreement,
if the Executive has been provided an opportunity to cure as provided in Section
4(c) of this Agreement;
(iv) the failure by the Executive to diligently pursue
in good faith and obtain any operating or other licenses required to be obtained
by the Executive individually for the execution of his duties and
responsibilities on behalf of the Company; provided, however, the Executive
shall be entitled to the severance pay and benefits set forth under Section 5(a)
hereof if the Executive's inability to obtain any operating or other license is
due to some factor outside of the Executive's control;
(v) the appropriation of a material business opportunity
of the Company, including attempting to secure or securing any personal profit
in connection with any transaction entered into on behalf of the Company;
(vi) the material misappropriation of any of the
Company's funds or property; or
(vii) the conviction of, or the entering of a guilty
plea or plea of no contest with respect to, a felony or the equivalent thereof.
(b) TERMINATION FOR GOOD REASON. The Executive shall have
the right to terminate his employment with the Company at any time for "good
reason" upon thirty days prior written notice to the Company. For purposes of
this Agreement and subject to the Company's opportunity to cure as provided in
Section 4(c) hereof, the Executive shall have "good reason" to terminate his
employment hereunder if such termination shall be the result of:
(i) a significant diminution during the Employment
Period in the Executive's duties or responsibilities as set forth in Section 2
hereof;
(ii) a significant breach by the Company of the
compensation and benefits provisions set forth in Section 3 hereof;
(iii) a notice of termination by the Executive under
Section 4(i) hereof within twelve months following the occurrence of a Change in
Control (as defined in Section 4(h) hereof);
(iv) a significant breach by the Company of any other
term of this Agreement; or
(v) the failure of the Company and the Executive to
agree to a written extension of this Agreement at least thirty days prior
to the expiration of the Term of this Agreement; provided, however, the
Executive's notice of termination under this provision must be received by the
Company prior to the expiration of the Term of this Agreement.
4
<PAGE>
(c) NOTICE OF OPPORTUNITY TO CURE. As noted in Section 4(a)
and Section 4(b), in certain situations it shall be a condition precedent to the
Company's right to terminate the Executive's employment for "cause" and the
Executive's right to terminate his employment for "good reason" that (1) the
party seeking the termination shall first have given the other party written
notice stating with specificity the reason for the termination ("breach") and
(2) if such breach is susceptible of cure or remedy, a period of 30 days from
and after the giving of such notice shall have elapsed without the breaching
party having effectively cured or remedied such breach during such 30-day
period, unless such breach cannot be cured or remedied within 30 days, in which
case the period for remedy or cure shall be extended for a reasonable time (not
to exceed an additional 30 days), provided the breaching party has made and
continues to make a diligent effort to effect such remedy or cure.
(d) TERMINATION UPON DEATH. Except as provided in this
Agreement, the Employment Period and all benefits and other rights of the
Executive under this Agreement shall be terminated by the death of the
Executive. The Executive's estate shall be entitled to receive all
compensation, reimbursements and benefits, including but not limited to life
insurance benefits, payable to or accruable for the benefit of the Executive
under this Agreement.
(e) TERMINATION UPON DISABILITY. The Employment Period may be
terminated by the Company if the Executive shall be rendered incapable of
performing his duties to the Company by reason of any medically determined
physical or mental impairment for a period of at least three consecutive months
(a "Disability"). In the event that the Company elects to terminate the
Employment Period due to the Disability of the Executive, the Executive shall
receive all compensation, reimbursements and other benefits payable to, or
accruable for the benefit of, the Executive under this Agreement through the
date of the determination of the Disability and to the date upon which the
Executive first becomes eligible to receive disability benefits pursuant to the
Company's long-term disability insurance policy as may then be in effect.
(f) TERMINATION WITHOUT CAUSE. The Company may terminate the
Executive's employment hereunder without "cause" at any time upon thirty days
prior written notice to the Executive; provided, however, that in the event of
such termination the Executive shall be entitled to the severance pay and
benefits set forth under Section 5(a) hereof.
(g) TERMINATION WITHOUT GOOD REASON. The Executive may
terminate his employment with the Company at any time without "good reason" upon
thirty days prior written notice to the Company; provided, however, the
Executive's effective date of termination shall be no later than sixty days
after the date of notice to the Company unless otherwise agreed by the Company.
In the event of such a voluntary termination by the Executive, the Executive
shall receive no further payments or benefits due under this Agreement from and
after the effective date of termination. A voluntary termination under this
Section 4(g) shall not be deemed a breach of this Agreement.
(h) DEFINITION OF CHANGE IN CONTROL. A "Change in Control"
shall be deemed to have taken place if:
5
<PAGE>
(i) there shall be consummated any consolidation or
merger of the Company in which the Company is not the continuing or surviving
corporation or pursuant to which shares of the Company's capital stock are
converted into cash, securities or other property, other than a consolidation or
merger of the Company in which the holders of the Company's voting stock
immediately prior to the consolidation or merger shall, upon consummation of the
consolidation or merger, own at least 50% of the voting stock of the surviving
corporation, or any sale, lease, exchange or other transfer (in one transaction
or a series of transactions contemplated or arranged by any party as a single
plan) of all or substantially all of the assets of the Company; or
(ii) any person (as such term is used in Sections 13(d)
and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), shall after the date hereof become the beneficial owner (as defined in
Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of
securities of the Company representing 35% or more of the voting power of all
then outstanding securities of the Company having the right under ordinary
circumstances to vote in an election of the Board (including, without
limitation, any securities of the Company that any such person has the right to
acquire pursuant to any agreement, or upon exercise of conversion rights,
warrants or options, or otherwise, which shall be deemed beneficially owned by
such person); or
(iii) individuals who at the date hereof constitute the
entire Board and any new directors whose election by the Board, or whose
nomination for election by the Company's stockholders, shall have been approved
by a vote of at least a majority of the directors then in office who either were
directors at the date hereto or whose election or nomination for election shall
have been so approved (the "Continuing Directors") shall cease for any reason to
constitute a majority of the members of the Board.
(i) NOTICE OF TERMINATION. Any termination of the
Executive's employment hereunder by either the Company or the Executive shall be
communicated to the other party by a "Notice of Termination" to be given in
accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of
Termination" means a written notice which (i) indicates the specific termination
provision in this Agreement relied upon, (ii) briefly summarizes the facts and
circumstances deemed to provide a basis for the termination of the Executive's
employment and the applicable provision hereof, and (iii) if the effective date
of termination is other than the date of receipt of such notice, specifies the
effective date of termination.
5. CONSEQUENCES OF TERMINATION
-----------------------------
(a) TERMINATION WITHOUT CAUSE OR FOR GOOD REASON. In the
event of termination of the Executive's employment hereunder by the Company
without "cause" pursuant to Section 4(f) hereof, by the Company pursuant to
Section 4(a)(iv) due to some factor outside of the Executive's control which
caused the Executive to be unable to obtain any operating or other license, or
by the Executive for "good reason" pursuant to Section 4(b) hereof, the
Executive shall be entitled to the following severance pay and benefits:
6
<PAGE>
(i) SEVERANCE PAY - severance payment in the form of a
lump sum single payment comprised of the Executive's base salary as in effect
immediately prior to such termination for the greater of nine months or the
remaining Term of this Agreement (the "Severance Period"), and any accrued,
earned or unpaid benefits applicable through the Severance Period, with all
benefits, including bonuses, to be earned through the Severance Period; and
(ii) BENEFITS CONTINUATION - continuation for the
Severance Period of coverage under the group health, dental, disability and life
insurance benefit plans or arrangements in which the Executive is participating
at the time of termination; provided, however, that the Company's obligation to
-------- -------
provide such coverages shall be terminated if the Executive is able to obtain
substitute effective coverage from another employer at any time during the
Severance Period. The Executive shall be entitled, at the expiration of the
Severance Period, to elect continued medical coverage in accordance with section
4980B of the Internal Revenue Code of 1986, as amended (or any successor
provision thereto).
(b) OTHER TERMINATIONS. In the event of termination of the
Executive's employment under Sections 4(a) (other than Section 4(a)(iv) as
noted), 4(d), 4(e) or 4(g) for any reason other than those specified in Section
5(a) hereof, the Executive shall not be entitled to any severance pay or
benefits continuation contemplated by the foregoing, except as may otherwise be
provided under the applicable benefit plans or award agreements relating to the
Executive.
(c) ACCRUED RIGHTS. Notwithstanding any other provision of
this Agreement, in the event of termination of the Executive's employment
hereunder for any reason, the Executive shall be entitled to payment of any
unpaid portion of his base salary through the effective date of termination, and
payment of any accrued but unpaid rights solely in accordance with the terms of
any incentive bonus, stock option or employee benefit plan or program of the
Company.
6. CONFIDENTIALITY
---------------
The Executive agrees that he will not at any time during the Employment
Period or at any time thereafter for any reason, in any fashion, form or manner,
either directly or indirectly, divulge, disclose or communicate to any person,
firm, corporation or other business entity, in any manner whatsoever, any
confidential information or trade secrets concerning the business of the
Company, including, without limiting the generality of the foregoing, the
techniques, methods or systems of its operation or management, any information
regarding its financial matters, or any other material information concerning
the business of the Company, its manner of operation, its plans or other
material data. The provisions of this Section 6 shall not apply to (i)
information that is public knowledge other than as a result of disclosure by the
Executive in breach of this Section 6; (ii) information disseminated by the
Company to third parties in the ordinary course of business; (iii) information
lawfully received by the Executive from a third party who, based upon inquiry by
the Executive, is not bound by a confidential relationship to the Company; or
(iv) information disclosed under a requirement of law or as directed by
applicable legal authority having jurisdiction over the Executive.
7
<PAGE>
The Executive further agrees that he will not remove from the Company's
premises (except to the extent such removal is for purposes of the performance
of the Executive's duties at home or while traveling, or except as otherwise
specifically authorized by the Company) Company property which includes, but is
not limited to, any document, record, notebook, plan, model, component, device,
or computer software or code, whether embodied in a disk or in any other form
(collectively, the "Proprietary Items"). The Executive recognizes that, as
between the Company and the Executive, all of the Proprietary Items, whether or
not developed by the Executive, are the exclusive property of the Company. Upon
termination of this Agreement by either party, or upon the request of the
Company during the Employment Period, the Executive will return to the Company
all of the Proprietary Items in the Executive's possession or subject to the
Executive's control, and the Executive shall not retain any copies, abstracts,
sketches, or other physical embodiments of any of the Proprietary Items.
7. INVENTIONS
----------
The Executive is hereby retained in a capacity such that the Executive's
responsibilities may include the making of technical and managerial
contributions of value to the Company. The Executive hereby assigns to the
Company all right, title and interest in such contributions and inventions made
or conceived by the Executive alone or jointly with others during the Employment
Period which directly relate to the business of the Company. This assignment
shall include (a) the right to file and prosecute patent applications on such
inventions in any and all countries, (b) the patent applications filed and
patents issuing thereon, and (c) the right to obtain copyright, trademark or
trade name protection for any such work product. The Executive shall promptly
and fully disclose all such contributions and inventions to the Company and
assist the Company in obtaining and protecting the rights therein (including
patents thereon) in any and all countries; provided, however, that said
-------- -------
contributions and inventions will be the property of Company, whether or not
patented or registered for copyright, trademark or trade name protection, as the
case may be. Inventions conceived by the Executive which are not related to the
business of the Company will remain the property of the Executive.
8. NON-COMPETITION
---------------
The Executive agrees that he shall not, during the Employment Period and/or
Severance Period and during the "Restricted Period," without the approval of the
Board, directly or indirectly, alone or as a partner, joint venturer, officer,
director, employee, consultant, agent, independent contractor or stockholder
(other than as provided below) of any company or business, engage in any
"Competitive Business" within a fifty mile radius of any locality in which the
Company or any of its subsidiaries or affiliates then operates; provided,
however, this non-competition provision shall not apply (i) if the Executive's
employment is terminated b the Executive pursuant to Section 4(b)(i), (ii),
(iii) or (iv) hereof, or (ii) if the Executive's employment is terminated by the
Company pursuant to Section 4(f) hereof, or (iii) if the Company and the
Executive mutually agree to terminate the Executive's employment. For purposes
of the foregoing, the term "Restricted Period" shall mean: (i) six months after
8
<PAGE>
the Employment Period or, if applicable, six months after the Severance Period,
whichever is longer, with respect to any "Competitive Business" outside of South
Carolina; and (ii) two years after the Employment Period or, if applicable, two
years after the Severance Period, whichever is longer, with respect to any
"Competitive Business" within South Carolina. For purposes of the foregoing,
the term "Competitive Business" shall mean any business involved in the
ownership, operation or management of a bingo or video gaming business or such
other business as the Company may then be engaged in as a primary source of
business. Notwithstanding the foregoing, the Executive shall not be prohibited,
during the non-competition period applicable above, from acting as a passive
investor where he owns not more than 2% of the issued and outstanding capital
stock of any publicly-held company. During the period that the above
non-competition restriction applies, the Executive shall not, without the
written consent of the Company, solicit any employee of the Company or any
employee of a subsidiary or affiliate of the Company to terminate his or her
employment. The period of time applicable to any covenant in this Section 8
will be extended by the duration of any violation by the Executive of such
covenant.
If any covenant in this Section 8 is held to be unreasonable, arbitrary, or
against public policy, such covenant will be considered to be divisible with
respect to scope, time, and geographic area, and such lesser scope, time or
geographic area, or all of them, as a court of competent jurisdiction may
determine to be reasonable, not arbitrary, and not against public policy, will
be effective, binding, and enforceable against the Executive.
9. BREACH OF RESTRICTIVE COVENANTS
----------------------------------
The parties agree that a breach or violation of Section 6, 7 or 8 hereof
will result in immediate and irreparable injury and harm to the innocent party,
who shall have, in addition to any and all remedies of law and other
consequences under this Agreement, the right to an injunction, specific
performance or other equitable relief to prevent the violation of the obligation
hereunder.
10. NOTICE
------
For purposes of this Agreement, notices, demands and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or (unless otherwise specified)
mailed by United States certified or registered mail, return receipt requested,
postage prepaid, addressed as follows:
(a) If to the Company, to:
American Bingo & Gaming Corp.
Attn: Andre M. Hilliou
1440 Charleston Highway
West Columbia, SC 29169
9
<PAGE>
(b) If to the Executive, to:
Richard M. Kelley
14612 Addison Street
Sherman Oaks, CA 91403
or to such other respective addresses as the parties hereto shall designate to
the other by like notice, provided that notice of a change of address shall be
effective only upon receipt thereof.
11. ARBITRATION; LEGAL FEES
-------------------------
Except as provided in Section 9 hereof, any dispute or controversy arising
under or in connection with this Agreement shall be settled exclusively by
arbitration in South Carolina in accordance with the rules of the American
Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction. The Company shall
reimburse the Executive for all reasonable legal fees and costs and other fees
and expenses which the Executive may incur in respect of any dispute or
controversy arising against the Company under or in connection with this
Agreement; provided, however, that the Company shall only reimburse the
-------- -------
Executive for such fees, costs and expenses if the Executive prevails in any
such action.
12. WAIVER OF BREACH
------------------
Any waiver of any breach of the Agreement shall not be construed to be a
continuing waiver or consent to any subsequent breach on the part either of the
Executive or of the Company.
13. NON-ASSIGNMENT; SUCCESSORS
---------------------------
Neither party hereto may assign his or its rights or delegate his or its
duties under this Agreement without the prior written consent of the other
party; provided, however, that (i) this Agreement shall inure to the benefit of
-------- -------
and be binding upon the successors and assigns of the Company upon any sale of
all or substantially all of the Company's assets, or upon any merger,
consolidation or reorganization of the Company with or into any other
corporation, all as though such successors and assigns of the Company and their
respective successors and assigns were the Company; and (ii) this Agreement
shall inure to the benefit of and be binding upon the heirs, assigns or
designees of the Executive to the extent of any payments due to them hereunder.
As used in this Agreement, the term "Company" shall be deemed to refer to any
such successor or assign of the Company referred to in the preceding sentence.
14. WITHHOLDING OF TAXES
----------------------
All payments required to be made by the Company to the Executive under this
Agreement shall be subject to the withholding of such amounts, if any, relating
to tax and other payroll deductions as the Company may reasonably determine it
should withhold pursuant to any applicable law or regulation.
10
<PAGE>
15. SEVERABILITY
------------
To the extent any provision of this Agreement or portion thereof shall be
invalid or unenforceable, it shall be considered deleted therefrom and the
remainder of such provision and of this agreement shall be unaffected and shall
continue in full force and effect.
16. COUNTERPARTS
------------
This Agreement may be executed in one or more counterparts, each of which
shall be deemed to be an original but all of which together shall constitute one
and the same instrument.
17. GOVERNING LAW
--------------
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of South Carolina without regard to the
conflicts of law principles thereof.
18. ENTIRE AGREEMENT
-----------------
This Agreement constitutes the entire agreement by the Company and the
Executive with respect to the subject matter hereof and supersedes any and all
prior agreements or understandings between the Executive and the Company with
respect to the subject matter hereof, whether written or oral. This Agreement
may be amended or modified only by written instrument executed by the Executive
and the Company.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first set forth above.
THE EXECUTIVE AMERICAN BINGO & GAMING CORP.
/s/ Richard M. Kelley /s/ Andre M. Hilliou
- ------------------------ -----------------
Richard M. Kelley By: Andre M. Hilliou
Its: President and Chief Executive Officer
11
<PAGE>
THIS EMPLOYMENT AGREEMENT IS SUBJECT TO ARBITRATION PURSUANT
------------------------------------------------------------
TO THE UNIFORM ARBITRATION ACT, S.C. CODE ANN. 15-48-10, ET SEQ.
-----------------------------------------------------------------
(LAW CO-OP. 1976 AND SUPP. 1997)
--------------------------------
AMENDMENT TO EMPLOYMENT AGREEMENT
THIS AMENDMENT TO EMPLOYMENT AGREEMENT (this "Amendment") between
American Bingo & Gaming Corp. (the "Company") and Richard M. Kelley (the
"Executive") is entered into as of the 23rd day of October, 1998.
WHEREAS, the Company and the Employee entered into an Employment
Agreement as of June 19, 1998 (the "Employment Agreement"); and
WHEREAS, the parties to the Employment Agreement wish to modify and
amend certain provisions of the Employment Agreement;
NOW, THEREFORE, in consideration of the recitals and mutual covenants,
conditions and agreements set forth herein and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties DO HEREBY AGREE as follows:
1. Amendment of Section 3(h). Section 3(h) of the Employment Agreement
-------------------------
is hereby amended to read in its entirety as follows:
(h) INDEMNIFICATION. During the Employment Period and thereafter, the
Company shall indemnify the Executive to the fullest extent permitted by
applicable law and at the full and direct cost and expense of the Company, and
the Executive shall be entitled to the protection of insurance policies the
Company may elect to maintain generally for the benefit of its officers, with
respect to all costs, charges and expenses whatsoever incurred or sustained by
the Executive in connection with any action, suit or proceeding to which he may
be made a party by reason of being or having been an officer or employee of the
Company or having served any other enterprise as a director, officer or employee
at the request of the Company. The Company shall maintain director and officer
insurance at reasonable and customary levels.
2. Amendment of Section 4(b). Section 4(b) of the Employment Agreement
-------------------------
is hereby amended to read in its entirety as follows:
(b) TERMINATION BY EXECUTIVE. The Executive shall have the right to
terminate his employment with the Company at any time and shall not be required
to state a reason for his termination. Such notice of termination shall be
given to the Company's Chief Executive Officer, or in his absence to the Human
Resources/Personnel Director in writing. The Executive shall provide between 14
days and 30 days advance written notice to the Company, at the sole and
exclusive discretion of the Executive; provided, however, the Company and the
Executive may mutually agree upon a longer or shorter notice period.
<PAGE>
3. Amendment of Section 4(c). Section 4(c) of the Employment Agreement
-------------------------
is hereby amended to read in its entirety as follows:
(c) NOTICE OF OPPORTUNITY TO CURE. As noted in Section 4(a), in certain
situations it shall be a condition precedent to the Company's right to terminate
the Executive's employment for "cause" that (1) the Company shall first have
given the Executive written notice stating with specificity the reason for the
termination ("breach") and (2) if such breach is susceptible of cure or remedy,
a period of 30 days from and after the giving of such notice shall have elapsed
without the Executive having effectively cured or remedied such breach during
such 30-day period, unless such breach cannot be cured or remedied within 30
days, in which case the period for remedy or cure shall be extended for a
reasonable time (not to exceed an additional 30 days, unless such delay is
beyond the control of the Executive), provided the Executive has made and
continues to make a diligent effort to effect such remedy or cure.
4. Amendment of Section 4(g). Section 4(g) of the Employment Agreement
-------------------------
is hereby amended to read in its entirety as follows:
(g) NOT USED.
5. Amendment of Section 4(i). Section 4(i) of the Employment Agreement
-------------------------
is hereby amended to read in its entirety as follows:
(i) NOTICE OF TERMINATION. Any termination of the Executive's employment
hereunder by either the Company or the Executive shall be communicated to the
other party by a "Notice of Termination" to be given in accordance with Section
10 hereof. For purposes of this Agreement, a "Notice of Termination" means a
written notice which (i) indicates the specific termination provision in this
Agreement relied upon, (ii) briefly summarizes the facts and circumstances
deemed to provide a basis for the termination of the Executive's employment and
the applicable provision hereof, unless it is a termination by the Executive
pursuant to Section 4(b) hereof in which case the Executive is not required to
disclose the facts and circumstances of the termination, and (iii) if the
effective date of termination is other than the date of receipt of such notice,
specifies the effective date of termination.
6. Amendment of Section 5(a). Section 5(a) of the Employment Agreement
-------------------------
is hereby amended to read in its entirety as follows:
2
<PAGE>
(a) TERMINATION WITHOUT CAUSE OR BY THE EXECUTIVE. In the event of
termination of the Executive's employment hereunder by the Company without
"cause" pursuant to Section 4(f) hereof, by the Company pursuant to Section
4(a)(iv) due to some factor outside of the Executive's control which caused the
Executive to be unable to obtain any operating or other license, or by the
Executive pursuant to Section 4(b) hereof, the Executive shall be entitled to
the following severance payments and benefits:
(i) SEVERANCE PAY - severance payment comprised of the greater of the
Executive's base salary as in effect immediately prior to such termination or
such higher base salary as in effect at any time during the twelve-month period
prior to such termination, for the greater of twelve months or the remaining
Term of this Agreement (the "Severance Period");
(ii) BONUSES - payment of the maximum bonus for which the Executive is
eligible during the Severance Period based upon the greater of the amount
provided in Section 3(b) hereof or such amount received from the Company in a
prior period;
(iii) BENEFITS - payment of the cash value of all benefits and other
perquisites available to the Executive during the Severance Period, including
but not limited to coverage under the group health, dental, disability and life
insurance benefit plans or arrangements, automobile allowance, and three weeks
of vacation plus sick leave; provided, however, even if the Executive shall
obtain such insurance coverage or other benefits during the Severance Period to
replace such benefits from the Company, the Executive shall not be required to
refund any portion of the cash value received by the Executive pursuant to this
provision; and
(iv) ACCRUED WAGES, BONUSES AND BENEFITS - payment of the Executive's
salary, bonuses and benefits for services in periods prior to the effective date
of termination which have not been paid to the Executive as of the date of
termination, which accrued wages, bonuses and benefits shall be considered to be
fully earned and due at the effective date of termination.
7. Amendment of Section 5(b). Section 5(b) of the Employment Agreement
-------------------------
is hereby amended to read in its entirety as follows:
(b) OTHER TERMINATIONS. In the event of termination of the Executive's
employment under Sections 4(a) (other than Section 4(a)(iv) as noted), 4(d) or
4(e) hereof, the Executive shall not be entitled to any severance pay or
benefits continuation contemplated by the foregoing, except as may otherwise be
provided under the applicable benefit plans or award agreements relating to the
Executive.
8. Addition of New Section 5(d). A new Section 5(d) shall be added to
----------------------------
the Employment Agreement, which shall read in its entirety as follows:
3
<PAGE>
(d) PAYMENT OF SEVERANCE BENEFITS. Prior to 12:00 p.m. on the effective
date of termination of the Executive, the Company shall pay to the Executive in
a single lump sum payment an amount equal to the sum of the items discussed in
Section 5(a) hereof. The amount of the total payment shall be paid in full to
the Executive without discount or set-off of any kind, except for withholdings
for taxes and other payroll deductions authorized by the Executive or otherwise
required by applicable law or regulation. All amounts calculated pursuant to
Section 5(a) hereof shall be considered fully earned and due through the
respective periods to which they relate.
9. Amendment of Section 8. The first paragraph of Section 8 of the
-----------------------
Employment Agreement is hereby amended to read in its entirety as follows:
The Executive agrees that he shall not, during the Employment Period and/or
Severance Period and during the "Restricted Period," without the approval of the
Board, directly or indirectly, alone or as a partner, joint venturer, officer,
director, employee, consultant, agent, independent contractor or stockholder
(other than as provided below) of any company or business, engage in any
"Competitive Business" within a fifty mile radius of any locality in which the
Company or any of its subsidiaries or affiliates then operates in South
Carolina; provided, however, this non-competition provision shall not apply (i)
if the Executive's employment is terminated by the Executive pursuant to Section
4(b) hereof, or (ii) if the Executive's employment is terminated by the Company
pursuant to Section 4(f) hereof, or (iii) if the Company and the Executive
mutually agree to terminate the Executive's employment. For purposes of the
foregoing, the term "Restricted Period" shall mean two years after the
Employment Period or, if applicable, two years after the Severance Period,
whichever is longer, with respect to any "Competitive Business" within South
Carolina. For purposes of the foregoing, the term "Competitive Business" shall
mean any business involved in the ownership, operation or management of a bingo
or video gaming business or such other business as the Company may then be
engaged in as a primary source of business. Notwithstanding the foregoing, the
Executive shall not be prohibited, during the non-competition period applicable
above, from acting as a passive investor where he owns not more than 2% of the
issued and outstanding capital stock of any publicly-held company. During the
period that the above non-competition restriction applies, the Executive shall
not, without the written consent of the Company, solicit any employee of the
Company or any employee of a subsidiary or affiliate of the Company to terminate
his or her employment. The period of time applicable to any covenant in this
Section 8 will be extended by the duration of any violation by the Executive of
such covenant.
10. Amendment of Section 14. Section 14 of the Employment Agreement
--------------------------
is hereby amended to read in its entirety as follows:
4
<PAGE>
Except as otherwise stated in this Amendment, all payments required to be
made by the Company to the Executive under this Agreement shall be subject to
the withholding of such amounts, if any, relating to tax and other payroll
deductions as the Company may reasonably determine it should withhold pursuant
to any applicable law or regulation.
11. Addition of New Section 19. A new Section 19 shall be added to
-----------------------------
the Employment Agreement, which shall read in its entirety as follows:
19. SURVIVAL OF CONDITIONS
------------------------
The provisions of Section 3(h) and Section 5 of this Agreement shall
survive and remain in full force and effect (i) during the term of this
Agreement, including any extensions hereof, (ii) during the term of the
Executive's employment with the Company, and (iii) after the termination of the
Executive's employment with the Company.
12. Miscellaneous. This Amendment controls over any contrary or
-------------
inconsistent provision of the Employment Agreement. Every provision of the
Employment Agreement not specifically amended or modified by the terms of this
Amendment shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first above written.
AMERICAN BINGO & GAMING CORP.
By: /s/ Andre M. Hilliou
-----------------------------------
Andre M. Hilliou, President and CEO
EXECUTIVE
/s/ Richard M. Kelley
------------------------
Richard M. Kelley
5
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (this "Agreement") is executed as of this 2nd day
of November, 1998 (the "Effective Date"), by and between AMERICAN BINGO & GAMING
CORP., a Delaware corporation (the "Company"), and NANCY POLLICK (the
"Executive").
WHEREAS, the parties wish to enter into an employment agreement to employ
the Executive as its Vice President, and to set forth certain additional
agreements between the Executive and the Company;
NOW, THEREFORE, in consideration of the mutual covenants and
representations contained herein, the parties hereto agree as follows:
1. TERM
----
The Company will employ the Executive, and the Executive will serve the
Company, under the terms of this Agreement, for an initial term of two years
commencing on November 2, 1998 (the "Employment Date"). The terms of this
Agreement may be extended for one or more additional twelve-month periods
provided the Company and the Executive agree in writing to such an extension no
later than thirty days prior to the expiration of the term of this Agreement.
Notwithstanding the foregoing, the Executive's employment hereunder may be
earlier terminated as provided in Section 4 hereof. The term of this Agreement,
as in effect from time to time in accordance with the foregoing, shall be
referred to herein as the "Term." The period of time between the Employment
Date and the termination of the Executive's employment hereunder shall be
referred to herein as the "Employment Period."
2. EMPLOYMENT
----------
(a) POSITIONS AND REPORTING. The Company hereby employs the Executive for
the Employment Period as its Vice President, on the terms and conditions set
forth in this Agreement.
(b) AUTHORITY AND DUTIES. The Executive shall exercise such authority,
perform such executive duties and functions and discharge such responsibilities
as the President of the Company may from time to time determine, consistent with
the Executive's position and the By-Laws of the Company. Without limiting the
generality of the foregoing, the Executive shall report directly and be
responsible to the President of the Company. During the Employment Period, the
Executive shall devote her full business time, skill and efforts to the business
of the Company. Notwithstanding the foregoing, the Executive may (i) make and
manage passive personal business investments of her choice (in the case of
publicly held corporations, not to exceed 2% of the outstanding voting stock)
and serve in any capacity with any civic, educational or charitable
organization, or any trade association, without seeking or obtaining approval
from the President of the Company, provided such activities and service do not
materially interfere or conflict with the performance of her duties hereunder,
and (ii) with the approval of the President, serve on the boards of directors of
other corporations.
1
<PAGE>
(c) PRIOR EMPLOYMENT. The Executive represents and warrants that she has no
individual employment agreement or non-competition agreement with her current or
any prior employer or any other agreement, contract, judgment, decree or
limitation which would prohibit, limit or otherwise restrict the employment of
the Executive by the Company pursuant to the terms of this Agreement.
3. COMPENSATION AND BENEFITS
---------------------------
(a) SALARY. During the Employment Period, the Company shall pay to the
Executive, as compensation for the performance of her duties and obligations
under this Agreement, a base salary at the rate of One Hundred Forty Thousand
($140,000) Dollars per annum, payable in arrears not less frequently than
monthly in accordance with the normal payroll practices of the Company. Such
base salary shall be subject to review each year for a possible increase, but
shall in no event be decreased from its then-existing level during the
Employment Period. The Executive may also be requested to serve as a director or
officer of various subsidiaries and affiliates of the Company and she hereby
agrees to fulfill her duties as such an officer and a director of such entities
without additional compensation.
(b) ANNUAL BONUS. During the Employment Period, the Executive shall have
the opportunity to earn an annual bonus pursuant to the terms of an incentive
bonus program. The Executive and the Company acknowledge that an incentive
program which will serve as the basis for determining the Executive's annual
bonus has not yet been established by the Company. The Company hereby
acknowledges that it intends to establish such bonus program as soon as possible
following the Employment Date.
(c) EQUITY PARTICIPATION. The Executive shall be entitled to receive awards
under any stock option or equity based incentive compensation plan or
arrangement adopted by the Company for which senior executives are eligible. The
level of the Executive's future participation in any such plan or arrangement
shall be determined by the Board of Directors and shall be comparable to other
executive officers of the Company.
(d) OTHER BENEFITS. During the Employment Period, the Executive shall be
entitled to participate in the Company's group health insurance plan, dental
plan, group life insurance plan, long-term disability insurance plan, employee
stock purchase plan, profit sharing plan, SARSEP and all of the other employee
benefit plans, programs and arrangements of the Company in effect during the
Employment Period which are generally available to senior executives of the
Company, subject to and on a basis consistent with the terms, conditions and
overall administration of such plans, programs and arrangements. In addition,
during the Employment Period, the Executive shall be entitled to fringe benefits
and perquisites comparable to those of other senior executives of the Company,
including, but not limited to, three weeks of paid vacation per year and
reasonable professional membership license fees and expenses.
(e) MOVING EXPENSES. The Company shall pay or reimburse the Executive for
the direct and reasonable expenses incurred in connection with relocating the
Executive and to Columbia, South Carolina; provided, however, such moving
expenses shall not exceed $10,000. In addition, during the transition period,
the Company shall pay up to six months of full furnished housing expenses for
the Executive and shall pay for the Executive's reasonable
2
<PAGE>
temporary ground transportation expenses or, at the determination of the
Company's President, shall pay for the Executive's vehicles to be transported to
South Carolina. It is the intent of this Section 3(e) that the Executive shall
not incur any out-of-pocket expenses related to her relocation to Columbia,
South Carolina.
(f) BUSINESS EXPENSES. During the Employment Period, the Company shall pay
directly or reimburse the Executive for all documented reasonable business
expenses incurred by the Executive in the performance of her duties under this
Agreement, in accordance with the Company's policies.
(g) INDEMNIFICATION. During the Employment Period and thereafter, the
Company shall indemnify the Executive to the fullest extent permitted by
applicable law, and the Executive shall be entitled to the protection of
insurance policies the Company may elect to maintain generally for the benefit
of its officers, with respect to all costs, charges and expenses whatsoever
incurred or sustained by the Executive in connection with any action, suit or
proceeding to which she may be made a party by reason of being or having been an
officer or employee of the Company or having served any other enterprise as a
director, officer or employee at the request of the Company. The Company shall
maintain director and officer insurance at reasonable and customary levels.
4. TERMINATION OF EMPLOYMENT
---------------------------
(a) TERMINATION FOR CAUSE. The Company may immediately terminate the
Executive's employment hereunder for "cause" upon written notice to the
Executive. For purposes of this Agreement, the Company shall have "cause" to
terminate the Executive's employment hereunder if such termination shall be the
result of:
(i) willful, material fraud or material dishonesty in connection with
the Executive's performance hereunder that results in harm to the Company;
(ii) the failure by the Executive to substantially perform her
material duties hereunder in good faith that results in material harm to
the Company, if the Executive has been provided an opportunity to cure as
provided in Section 4(c) of this Agreement;
(iii) the Executive's material breach of this Agreement, if the
Executive has been provided an opportunity to cure as provided in Section
4(c) of this Agreement;
(iv) the failure by the Executive to diligently pursue in good faith
and obtain any operating or other licenses required to be obtained by the
Executive individually for the execution of her duties and responsibilities
on behalf of the Company; provided, however, the Executive shall be
entitled to the severance pay and benefits set forth under Section 5(a)
hereof if the Executive's inability to obtain any operating or other
license is due to some factor outside of the Executive's control;
3
<PAGE>
(v) the appropriation of a material business opportunity of the
Company, including attempting to secure or securing any personal profit in
connection with any transaction entered into on behalf of the Company;
(vi) the material misappropriation of any of the Company's funds or
property; or
(vii) the conviction of, or the entering of a guilty plea or plea of
no contest with respect to, a felony or the equivalent thereof.
(b) TERMINATION FOR GOOD REASON. The Executive shall have the right to
terminate her employment with the Company at any time for "good reason" upon
thirty days prior written notice to the Company. For purposes of this Agreement
and subject to the Company's opportunity to cure as provided in Section 4(c)
hereof, the Executive shall have "good reason" to terminate her employment
hereunder if such termination shall be the result of:
(i) a significant diminution during the Employment Period in the
Executive's duties or responsibilities as set forth in Section 2 hereof;
(ii) a significant breach by the Company of the compensation and
benefits provisions set forth in Section 3 hereof;
(iii) a notice of termination by the Executive under Section 4(i)
hereof within twelve months following the occurrence of a Change in Control
(as defined in Section 4(h) hereof);
(iv) a significant breach by the Company of any other term of this
Agreement; or
(v) the failure of the Company and the Executive to agree to a written
extension of this Agreement at least thirty days prior to the expiration of
the Term of this Agreement; provided, however, the Executive's notice of
termination under this provision must be received by the Company prior to
the expiration of the Term of this Agreement.
(c) NOTICE OF OPPORTUNITY TO CURE. As noted in Section 4(a) and Section
4(b), in certain situations it shall be a condition precedent to the Company's
right to terminate the Executive's employment for "cause" and the Executive's
right to terminate her employment for "good reason" that (1) the party seeking
the termination shall first have given the other party written notice stating
with specificity the reason for the termination ("breach") and (2) if such
breach is susceptible of cure or remedy, a period of 30 days from and after the
giving of such notice shall have elapsed without the breaching party having
effectively cured or remedied such breach during such 30-day period, unless such
breach cannot be cured or remedied within 30 days, in which case the period for
remedy or cure shall be extended for a reasonable time (not to exceed an
additional 30 days), provided the breaching party has made and continues to make
a diligent effort to effect such remedy or cure.
4
<PAGE>
(d) TERMINATION UPON DEATH. Except as provided in this Agreement, the
Employment Period and all benefits and other rights of the Executive under this
Agreement shall be terminated by the death of the Executive. The Executive's
estate shall be entitled to receive all compensation, reimbursements and
benefits, including but not limited to life insurance benefits, payable to or
accruable for the benefit of the Executive under this Agreement.
(e) TERMINATION UPON DISABILITY. The Employment Period may be terminated by
the Company if the Executive shall be rendered incapable of performing her
duties to the Company by reason of any medically determined physical or mental
impairment for a period of at least three consecutive months (a "Disability").
In the event that the Company elects to terminate the Employment Period due to
the Disability of the Executive, the Executive shall receive all compensation,
reimbursements and other benefits payable to, or accruable for the benefit of,
the Executive under this Agreement through the date of the determination of the
Disability and to the date upon which the Executive first becomes eligible to
receive disability benefits pursuant to the Company's long-term disability
insurance policy as may then be in effect.
(f) TERMINATION WITHOUT CAUSE. The Company may terminate the Executive's
employment hereunder without "cause" at any time upon thirty days prior written
notice to the Executive; provided, however, that in the event of such
termination the Executive shall be entitled to the severance pay and benefits
set forth under Section 5(a) hereof.
(g) TERMINATION WITHOUT GOOD REASON. The Executive may terminate her
employment with the Company at any time without "good reason" upon thirty days
prior written notice to the Company; provided, however, the Executive's
effective date of termination shall be no later than sixty days after the date
of notice to the Company unless otherwise agreed by the Company. In the event of
such a voluntary termination by the Executive, the Executive shall receive no
further payments or benefits due under this Agreement from and after the
effective date of termination. A voluntary termination under this Section 4(g)
shall not be deemed a breach of this Agreement.
(h) DEFINITION OF CHANGE IN CONTROL. A "Change in Control" shall be deemed
to have taken place if:
(i) there shall be consummated any consolidation or merger of the
Company in which the Company is not the continuing or surviving corporation
or pursuant to which shares of the Company's capital stock are converted
into cash, securities or other property, other than a consolidation or
merger of the Company in which the holders of the Company's voting stock
immediately prior to the consolidation or merger shall, upon consummation
of the consolidation or merger, own at least 50% of the voting stock of the
surviving corporation, or any sale, lease, exchange or other transfer (in
one transaction or a series of transactions contemplated or arranged by any
party as a single plan) of all or substantially all of the assets of the
Company; or
(ii) any person (as such term is used in Sections 13(d) and 14(d)(2)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act")),
shall after the date hereof become the beneficial owner (as defined in
Rules 13d-3 and 13d-5
5
<PAGE>
under the Exchange Act), directly or indirectly, of securities of the
Company representing 35% or more of the voting power of all then
outstanding securities of the Company having the right under ordinary
circumstances to vote in an election of the Board (including, without
limitation, any securities of the Company that any such person has the
right to acquire pursuant to any agreement, or upon exercise of conversion
rights, warrants or options, or otherwise, which shall be deemed
beneficially owned by such person); or
(iii) individuals who at the date hereof constitute the entire Board
and any new directors whose election by the Board, or whose nomination for
election by the Company's stockholders, shall have been approved by a vote
of at least a majority of the directors then in office who either were
directors at the date hereto or whose election or nomination for election
shall have been so approved (the "Continuing Directors") shall cease for
any reason to constitute a majority of the members of the Board.
(i) NOTICE OF TERMINATION. Any termination of the Executive's
employment hereunder by either the Company or the Executive shall be
communicated to the other party by a "Notice of Termination" to be given in
accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of
Termination" means a written notice which (i) indicates the specific termination
provision in this Agreement relied upon, (ii) briefly summarizes the facts and
circumstances deemed to provide a basis for the termination of the Executive's
employment and the applicable provision hereof, and (iii) if the effective date
of termination is other than the date of receipt of such notice, specifies the
effective date of termination.
5. CONSEQUENCES OF TERMINATION
-----------------------------
(a) TERMINATION WITHOUT CAUSE OR FOR GOOD REASON. In the event of
termination of the Executive's employment hereunder by the Company without
"cause" pursuant to Section 4(f) hereof, by the Company pursuant to Section
4(a)(iv) due to some factor outside of the Executive's control which caused the
Executive to be unable to obtain any operating or other license, or by the
Executive for "good reason" pursuant to Section 4(b) hereof, the Executive shall
be entitled to the following severance pay and benefits:
(i) SEVERANCE PAY - severance payment in the form of a lump sum single
payment comprised of the Executive's base salary as in effect immediately
prior to such termination for the greater of nine months or the remaining
Term of this Agreement (the "Severance Period"), and any accrued, earned or
unpaid benefits applicable through the Severance Period, with all benefits,
including bonuses, to be earned through the Severance Period; and
(ii) BENEFITS CONTINUATION - continuation for the Severance Period of
coverage under the group health, dental, disability and life insurance
benefit plans or arrangements in which the Executive is participating at
the time of termination; provided, however, that the Company's obligation
-------- -------
to provide such coverages shall be terminated if the Executive is able to
obtain substitute
6
<PAGE>
effective coverage from another employer at any time during the Severance
Period. The Executive shall be entitled, at the expiration of the Severance
Period, to elect continued medical coverage in accordance with section
4980B of the Internal Revenue Code of 1986, as amended (or any successor
provision thereto).
(b) OTHER TERMINATIONS. In the event of termination of the Executive's
employment under Sections 4(a) (other than Section 4(a)(iv) as noted), 4(d),
4(e) or 4(g) for any reason other than those specified in Section 5(a) hereof,
the Executive shall not be entitled to any severance pay or benefits
continuation contemplated by the foregoing, except as may otherwise be provided
under the applicable benefit plans or award agreements relating to the
Executive.
(c) ACCRUED RIGHTS. Notwithstanding any other provision of this Agreement,
in the event of termination of the Executive's employment hereunder for any
reason, the Executive shall be entitled to payment of any unpaid portion of her
base salary through the effective date of termination, and payment of any
accrued but unpaid rights solely in accordance with the terms of any incentive
bonus, stock option or employee benefit plan or program of the Company.
6. CONFIDENTIALITY
---------------
The Executive agrees that she will not at any time during the Employment
Period or at any time thereafter for any reason, in any fashion, form or manner,
either directly or indirectly, divulge, disclose or communicate to any person,
firm, corporation or other business entity, in any manner whatsoever, any
confidential information or trade secrets concerning the business of the
Company, including, without limiting the generality of the foregoing, the
techniques, methods or systems of its operation or management, any information
regarding its financial matters, or any other material information concerning
the business of the Company, its manner of operation, its plans or other
material data. The provisions of this Section 6 shall not apply to (i)
information that is public knowledge other than as a result of disclosure by the
Executive in breach of this Section 6; (ii) information disseminated by the
Company to third parties in the ordinary course of business; (iii) information
lawfully received by the Executive from a third party who, based upon inquiry by
the Executive, is not bound by a confidential relationship to the Company; or
(iv) information disclosed under a requirement of law or as directed by
applicable legal authority having jurisdiction over the Executive.
The Executive further agrees that she will not remove from the Company's
premises (except to the extent such removal is for purposes of the performance
of the Executive's duties at home or while traveling, or except as otherwise
specifically authorized by the Company) Company property which includes, but is
not limited to, any document, record, notebook, plan, model, component, device,
or computer software or code, whether embodied in a disk or in any other form
(collectively, the "Proprietary Items"). The Executive recognizes that, as
between the Company and the Executive, all of the Proprietary Items, whether or
not developed by the Executive, are the exclusive property of the Company. Upon
termination of this Agreement by either party, or upon the request of the
Company during the Employment Period, the Executive will return to the Company
all of the Proprietary Items in the Executive's possession or subject to the
Executive's control, and the Executive shall not retain any copies, abstracts,
sketches, or other physical embodiments of any of the Proprietary Items.
7
<PAGE>
7. INVENTIONS
----------
The Executive is hereby retained in a capacity such that the Executive's
responsibilities may include the making of technical and managerial
contributions of value to the Company. The Executive hereby assigns to the
Company all right, title and interest in such contributions and inventions made
or conceived by the Executive alone or jointly with others during the Employment
Period which directly relate to the business of the Company. This assignment
shall include (a) the right to file and prosecute patent applications on such
inventions in any and all countries, (b) the patent applications filed and
patents issuing thereon, and (c) the right to obtain copyright, trademark or
trade name protection for any such work product. The Executive shall promptly
and fully disclose all such contributions and inventions to the Company and
assist the Company in obtaining and protecting the rights therein (including
patents thereon) in any and all countries; provided, however, that said
-------- -------
contributions and inventions will be the property of Company, whether or not
patented or registered for copyright, trademark or trade name protection, as the
case may be. Inventions conceived by the Executive which are not related to the
business of the Company will remain the property of the Executive.
8. NON-COMPETITION
---------------
The Executive agrees that she shall not, during the Employment Period
and/or Severance Period and during the "Restricted Period," without the approval
of the Board, directly or indirectly, alone or as a partner, joint venturer,
officer, director, employee, consultant, agent, independent contractor or
stockholder (other than as provided below) of any company or business, engage in
any "Competitive Business" within a fifty mile radius of any locality in which
the Company or any of its subsidiaries or affiliates then operates; provided,
however, this non-competition provision shall not apply (i) if the Executive's
employment is terminated by the Executive pursuant to Section 4(b)(i), (ii),
(iii) or (iv) hereof, or (ii) if the Executive's employment is terminated by the
Company pursuant to Section 4(f) hereof, or (iii) if the Company and the
Executive mutually agree to terminate the Executive's employment. For purposes
of the foregoing, the term "Restricted Period" shall mean: (i) six months after
the Employment Period or, if applicable, six months after the Severance Period,
whichever is longer, with respect to any "Competitive Business" outside of South
Carolina; and (ii) two years after the Employment Period or, if applicable, two
years after the Severance Period, whichever is longer, with respect to any
"Competitive Business" within South Carolina. For purposes of the foregoing,
the term "Competitive Business" shall mean any business involved in the
ownership, operation or management of a bingo or video gaming business or such
other business as the Company may then be engaged in as a primary source of
business. Notwithstanding the foregoing, the Executive shall not be prohibited,
during the non-competition period applicable above, from acting as a passive
investor where she owns not more than 2% of the issued and outstanding capital
stock of any publicly-held company. During the period that the above
non-competition restriction applies, the Executive shall not, without the
written consent of the Company, solicit any employee of the Company or any
employee of a subsidiary or affiliate of the Company to terminate his or her
employment. The period of time applicable to any covenant in this Section 8
will be extended by the duration of any violation by the Executive of such
covenant.
8
<PAGE>
If any covenant in this Section 8 is held to be unreasonable, arbitrary, or
against public policy, such covenant will be considered to be divisible with
respect to scope, time, and geographic area, and such lesser scope, time or
geographic area, or all of them, as a court of competent jurisdiction may
determine to be reasonable, not arbitrary, and not against public policy, will
be effective, binding, and enforceable against the Executive.
9. BREACH OF RESTRICTIVE COVENANTS
----------------------------------
The parties agree that a breach or violation of Section 6, 7 or 8 hereof
will result in immediate and irreparable injury and harm to the innocent party,
who shall have, in addition to any and all remedies of law and other
consequences under this Agreement, the right to an injunction, specific
performance or other equitable relief to prevent the violation of the obligation
hereunder.
10. NOTICE
------
For purposes of this Agreement, notices, demands and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or (unless otherwise specified)
mailed by United States certified or registered mail, return receipt requested,
postage prepaid, addressed as follows:
(a) If to the Company, to:
American Bingo & Gaming Corp.
Attn: Andre M. Hilliou
1440 Charleston Highway
West Columbia, SC 29169
(b) If to the Executive, to:
Nancy Pollick
639 North Dover Avenue
Atlantic City, NJ 08401
or to such other respective addresses as the parties hereto shall designate to
the other by like notice, provided that notice of a change of address shall be
effective only upon receipt thereof.
11. ARBITRATION; LEGAL FEES
-------------------------
Except as provided in Section 9 hereof, any dispute or controversy arising
under or in connection with this Agreement shall be settled exclusively by
arbitration in South Carolina in accordance with the rules of the American
Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction. The Company shall
reimburse the Executive for all reasonable legal fees and costs and other fees
and expenses which the Executive may incur in respect of any dispute or
controversy arising against the Company under or in connection with this
Agreement; provided, however, that the Company shall only reimburse the
-------- -------
9
<PAGE>
Executive for such fees, costs and expenses if the Executive prevails in any
such action.
12. WAIVER OF BREACH
------------------
Any waiver of any breach of the Agreement shall not be construed to be a
continuing waiver or consent to any subsequent breach on the part either of the
Executive or of the Company.
13. NON-ASSIGNMENT; SUCCESSORS
---------------------------
Neither party hereto may assign her or its rights or delegate her or its
duties under this Agreement without the prior written consent of the other
party; provided, however, that (i) this Agreement shall inure to the benefit of
-------- -------
and be binding upon the successors and assigns of the Company upon any sale of
all or substantially all of the Company's assets, or upon any merger,
consolidation or reorganization of the Company with or into any other
corporation, all as though such successors and assigns of the Company and their
respective successors and assigns were the Company; and (ii) this Agreement
shall inure to the benefit of and be binding upon the heirs, assigns or
designees of the Executive to the extent of any payments due to them hereunder.
As used in this Agreement, the term "Company" shall be deemed to refer to any
such successor or assign of the Company referred to in the preceding sentence.
14. WITHHOLDING OF TAXES
----------------------
All payments required to be made by the Company to the Executive under this
Agreement shall be subject to the withholding of such amounts, if any, relating
to tax and other payroll deductions as the Company may reasonably determine it
should withhold pursuant to any applicable law or regulation.
15. SEVERABILITY
------------
To the extent any provision of this Agreement or portion thereof shall be
invalid or unenforceable, it shall be considered deleted therefrom and the
remainder of such provision and of this agreement shall be unaffected and shall
continue in full force and effect.
16. COUNTERPARTS
------------
This Agreement may be executed in one or more counterparts, each of which
shall be deemed to be an original but all of which together shall constitute one
and the same instrument.
17. GOVERNING LAW
--------------
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of South Carolina without regard to the
conflicts of law principles thereof.
10
<PAGE>
18. ENTIRE AGREEMENT
-----------------
This Agreement constitutes the entire agreement by the Company and the
Executive with respect to the subject matter hereof and supersedes any and all
prior agreements or understandings between the Executive and the Company with
respect to the subject matter hereof, whether written or oral. This Agreement
may be amended or modified only by written instrument executed by the Executive
and the Company.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first set forth above.
THE EXECUTIVE AMERICAN BINGO & GAMING CORP.
/s/ Nancy Pollick /s/ Andre M. Hilliou
- ------------------- -----------------
Nancy Pollick By: Andre M. Hilliou
Its: President and Chief Executive Officer
11
<PAGE>
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT (this "Agreement") is made and entered
into effective as of the 9th day of November, 1998, by and between American
Bingo & Gaming Corp., a Delaware corporation (the "Company"), and Michael W.
Mims ("Consultant").
W I T N E S S E T H:
-------------------
WHEREAS, the Company is desirous of Consultant providing certain
services to the Company; and
WHEREAS, Consultant desires to provide such services to the Company;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the parties hereto hereby agree as follows:
1. Services. The Company hereby retains Consultant to perform such services
--------
in connection with the Company's video poker operations or such other business
in South Carolina as the Company shall reasonably request from time to time, and
Consultant agrees to perform such services.
2. Compensation. In consideration for the services provided by Consultant
------------
hereunder, the Company shall pay Consultant a total fee of $60,000, which fee
shall be paid for as long as this Agreement remains in effect, on the following
schedule: (i) $30,000 on November 9, 1998, and (ii) $30,000 on November 9, 1999.
3. Termination of Employment Agreement. Consultant hereby resigns from any
-----------------------------------
and all positions he holds with the Company and any subsidiary of the Company,
including, but not limited to, positions held as an officer, director, board
committee member and employee (except as provided below); provided, however,
Consultant is not resigning his position as a member of the Company's Board of
Directors or any committee thereof. In addition, the Company and Consultant
mutually agree to terminate the Employment Agreement dated September 24, 1997,
as amended July 27, 1998, by and between such parties effective as of the date
of this Agreement.
4. Term. This Agreement shall be effective as of November 9, 1998, and
----
shall continue until November 8, 2000.
5. Cooperation with the Company. Consultant shall fully cooperate and work
----------------------------
with the Company in connection with its activities under this Agreement.
6. Relationship of the Parties. The relationship between Consultant and the
---------------------------
Company shall be that of an independent contractor. Nothing contained in this
Agreement shall be deemed to constitute a relationship of agency, joint venture,
partnership or any other relationship than that specified. Consultant
<PAGE>
shall be responsible for all income, social security and other state, local and
federal taxes that arise as a result of the relationship contemplated hereby and
the payments made hereunder.
7. Termination. This Agreement may be terminated by the Company (a) upon
-----------
the death of Consultant, (b) if the Company determines in good faith that a
Total Disability of Consultant has occurred ("Total Disability" shall mean any
illness, accident or other similar situation as a result of which Consultant is
unable to perform his duties hereunder for a period of 90 days), (c) for Cause
("Cause" shall mean Consultant's breach of fiduciary duty to the Company
involving personal profit, Consultant's intentional and material failure to
perform stated duties (after written notice thereof and a reasonable opportunity
to cure such failure), conviction of the Consultant by any court of competent
jurisdiction of a felony, or Consultant's material and continuing breach of any
provision of this Agreement (after written notice thereof and a reasonable
opportunity to cure such breach)), (d) if a gaming regulatory authority in any
jurisdiction in which the Company, or any of its subsidiaries, is operating or
is seeking to obtain licensing determines that the Consultant fails to satisfy
the applicable suitability requirements, or (e) if the Master Coin Machine
Agreement by and among the Company, Gold Strike, Inc., Mims & Dye Enterprises,
LLC, Consultant, and Danny C. Dye is terminated for any reason. This Agreement
may be terminated by Consultant if (a) the Company materially breaches its
obligation to make payment to Consultant pursuant to this Agreement or (b) a
gaming regulatory authority in any jurisdiction in which the Consultant or any
of his affiliates is operating or is seeking to obtain licensing determines that
the Consultant or any such affiliate fails to satisfy the applicable suitability
requirements as a result of the relationship created by this Agreement.
8. Limited Authority. Consultant acknowledges that he has no power or
------------------
authority to enter into any contract or otherwise incur any liability on behalf
of the Company without its prior written approval. Consultant hereby agrees to
hold harmless and indemnify the Company against all liability, cost and expense,
including attorney's fees, which may be suffered or incurred by the Company as a
result of any breach of this Section 8.
9. Notice. Any notices, requests, demands and other communications
------
hereunder shall be in writing and shall be delivered by hand with a signed
receipt, by registered or certified mail, return receipt requested, postage
prepaid, by a recognized overnight courier, or by facsimile transmission with
the original sent by mail on that same day, addressed as follows:
If to Consultant: Michael W. Mims
257 Amenity Road
Chapin, SC 29036
If to the Company: American Bingo & Gaming Corp.
1440 Charleston Highway
West Columbia, SC 29169
Attn: Chief Executive Officer
If delivered personally, the date on which a notice, request, instruction or
document is delivered shall be the date on which such delivery is made and, if
<PAGE>
delivered by mail, courier or facsimile, the date on which such notice, request,
instruction or document is received shall be the date of delivery. Any party
hereto may change its address specified for notices herein by designating a new
address by notice in writing in accordance with this Section.
10. Modification; Waiver; Amendments. No provision of this Agreement may be
--------------------------------
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing, signed by Consultant and the Company. No waiver by any
party hereto at any time of any breach by any other party hereto of, or
compliance with, any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of any similar or dissimilar
provisions or conditions at the same or at any prior or subsequent time. No
amendments or additions to this Agreement shall be binding unless in writing and
signed by all parties hereto, except as herein otherwise provided.
11. Applicable Law. This Agreement shall be governed in all respects
---------------
whether as to validity, construction, capacity, performance or otherwise, by the
laws of the State of South Carolina, without regard to choice of law principles.
12. Assignment. This Agreement, and Consultant's rights and obligations
----------
hereunder, may not be assigned by Consultant. This Agreement, and the Company's
rights and obligations hereunder, may not be assigned by the Company except to a
successor in interest to the Company as a result of a merger, consolidation or
sale of all or substantially all of the assets of the Company, in which event
the obligations of the Company hereunder shall be binding on its successors or
assigns, whether by merger, consolidation, or acquisition of al1 or
substantially all of its assets.
13. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
14. Entire Agreement. This Agreement shall constitute the entire agreement
----------------
between the parties with respect to the subject matter hereof, and any prior
understanding or representation of any kind preceding the date of this Agreement
shall not be binding upon either party except to the extent incorporated in this
Agreement.
15. Headings. The titles to the sections of this Agreement are solely for
--------
the convenience of the parties and shall not be used to explain, modify,
simplify, or aid in interpretation of the provisions of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Consulting Agreement to
be effective as of the day and year first hereinabove written.
AMERICAN BINGO & GAMING CORP.
By: /s/ George M. Harrison
--------------------
George M. Harrison, Jr., Vice President
<PAGE>
CONSULTANT
/s/ Michael W. Mims
-----------------
Michael W. Mims
<PAGE>
THIS AGREEMENT IS SUBJECT TO ARBITRATION PURSUANT TO THE
--------------------------------------------------------
UNIFORM ARBITRATION ACT, S.C. CODE ANN. 15-48-10, ET SEQ.
----------------------------------------------------------
(LAW CO-OP. 1976 AND SUPP. 1997).
---------------------------------
MASTER COIN MACHINE AGREEMENT
THIS MASTER COIN MACHINE AGREEMENT (this "Agreement") is made and entered
into effective as of the 9th day of November, 1998, by and between Gold Strike,
Inc., a South Carolina corporation (the "Company"), American Bingo & Gaming
Corp., a Delaware corporation ("ABG"), Mims & Dye Enterprises, LLC, a South
Carolina limited liability company (the "Operator"), and Michael W. Mims
("Mims") and Danny C. Dye ("Dye"), individually, as to Sections 9 and 20 only.
WHEREAS, the Company and the Operator desire to enter into a contract
through which the Company will supply the Operator with video gaming machines
("Machines") to be used at the locations identified on Exhibit A attached hereto
(the "Existing Locations") and at additional locations operated by the Operator
for which the Company and the Operator shall mutually agree to have the Company
supply Machines (the "Future Locations", with the Existing Locations and the
Future Locations referred to collectively as the "Locations");
NOW, THEREFORE, in consideration of the premises, the mutual promises and
covenants of the parties hereto set forth herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
Company, ABG and the Operator, intending to be legally bound, agree as follows:
1. Exclusive Right. The Company shall have the exclusive right to place
-----------------
Machines in the Existing Locations, and any Future Locations as the Company and
the Operator may mutually agree, during the term of this Agreement and any
extension or renewal hereof, at the rates set forth in Section 2 below. During
the term of this Agreement and any extensions or renewals thereof, no other
person, firm or corporation, including the Operator, shall have the right to
operate, install, store, use or exhibit, in any manner, Machines upon any of the
Locations at which the Company is supplying Machines.
2. Consideration. The Company shall receive 30% of the total gross revenues
--------------
after payouts of winnings on all Machines in the Existing Locations,
whether such Machines are owned, leased or otherwise maintained in such
locations. The Company shall receive 30%, or such different percentage as the
Company and the Operator shall mutually agree, of the total gross revenues after
payouts of winnings on all Machines in the Future Locations, whether such
Machines are owned, leased or otherwise maintained in such locations. The
Operator shall be responsible for collecting all revenue generated by the
Machines and shall remit to the Company its share of the total gross revenues on
each Machine no less frequently than once every week when the Company's
representative visits each Location. The Operator shall be responsible for all
costs related to the operation of each Location.
1
<PAGE>
3. Term. The term of this Agreement shall be for three years. At the end
-----
of the three-year term, the Company and the Operator may extend this Agreement
on terms mutually agreeable to all parties if such parties can reach agreement
on the terms of the extension at least ninety days before the end of the
three-year term.
4. Machine Licenses. The Company shall be responsible for obtaining all
------------------
machine licenses necessary to operate the Machines at the Locations. The
Operator shall reimburse the Company for 50% of the cost of all machine licenses
for all Machines provided to the Operator during the term of this Agreement
by paying $20 per week per Machine. This weekly charge for machine licenses
shall be paid to the Company on a weekly basis when the Company's representative
visits each Location. The weekly charge for the licenses is subject to increase
or decrease at any time as the cost of such licenses is adjusted by the
applicable state regulatory agency. In the event the Operator and the Company
mutually agree for the Company to maintain additional machine licenses for which
there are no Machines provided to the Operator under this Agreement, the
Operator shall pay to the Company $40 per week for each such license, or such
higher amount as shall be calculated based upon the cost of such license when
amortized on a weekly basis. This weekly charge for such additional licenses
shall be paid to the Company on a weekly basis and the Company's representative
shall pick-up the money from the Operator's corporate headquarters every Monday.
5. Machine Payouts. The payouts for all Machines operated pursuant to this
-----------------
Agreement shall be set at no less than 92% and no more than 97%. The Operator
shall not set the payouts outside of this range without obtaining the prior
written consent of the Company. For these purposes, the payout percentage shall
be calculated by dividing the total winnings by the total play revenues.
6. Business of Operator.
-----------------------
a. The Operator shall obtain and maintain all necessary business licenses
and other licenses required to operate the Locations; provided, however, the
Company shall obtain and maintain the necessary machine licenses as set forth in
Section 4 above.
b. The Operator, ABG and the Company shall maintain proper, timely and
accurate books and records of all activities undertaken pursuant to this
Agreement as required by law or otherwise. Each party shall provide such
information to any other party as requested by such other party in order for
such other party to maintain proper, timely and accurate books and records of
all activities undertaken pursuant to this Agreement.
c. The Operator shall operate its business and each of the Locations, and
ABG and the Company shall conduct their respective businesses related to
providing Machines hereunder, in compliance with all applicable laws,
regulations, rules and ordinances. The Operator shall not permit any violations
of any laws, regulations, rules or ordinances to occur on any of the Locations
which result from actions of the Operator. In addition, the Operator
2
<PAGE>
shall take all actions which are reasonable and customary for the Operator's
business to prevent any violations of any laws, regulations, rules or ordinances
to occur on any of the Locations which result from actions of any third party.
d. The Operator acknowledges and agrees that the Locations shall only be
used to conduct a video gaming business. The Operator shall not maintain, permit
or allow any action, product or service at any of the Locations which would be
counter to the positive image of the Company or an impairment to the licensing
of any operations of the Company or any subsidiary or affiliate in any
jurisdiction or venue.
e. The Operator shall notify the Company, and ABG or the Company shall
notify the Operator, in writing within 24 hours after obtaining any knowledge
that the notifying party is not, or allegedly is not, in compliance with any of
the terms of this Section, unless such notice is prohibited by applicable laws
or regulations.
7. Machines. All Machines placed at any of the Locations shall remain the
---------
sole and exclusive property of the Company and neither the Operator nor any
third party shall have any right or claim to any Machine. All Machines so placed
at any Location shall bear the name of the Company and shall state thereon that
said Machines are the sole property of the Company. The Operator shall take all
actions which are reasonable and customary for the Operator's business in an
effort to protect and safeguard the Machines, not only from theft and damage but
also from any lien, encumbrance or other attachment. The Operator is also
responsible for directing and supervising its employees, agents and other
representatives in a way that is reasonable and customary for the Operator's
business in an effort to protect the Machines from being cheated, robbed or
damaged, and the Operator shall pay the Company for any such loss or damage
caused by the Operator's failure to so direct and supervise its employees,
agents or other representatives.
8. Repair and Maintenance of Machines. The Operator shall have the full
--------------------------------------
responsibility for taking all action which is reasonable and customary for the
Operator's business to maintain and repair the Machines during the term of this
Agreement, and shall at all times keep each Machine in good repair and working
order; provided, however, the Operator shall not be responsible for repairing or
replacing Machines that are damaged or destroyed by fire, flood, vandalism or
some other catastrophic event unless the damage or destruction resulted from or
involved the negligence or willful, wanton, reckless or intentional conduct of
the Operator or an employee, agent or other representative of the Operator. The
Company shall be responsible for providing all parts which may be necessary to
repair or maintain any Machine, with all used parts returned to the Company;
provided, however, the Company shall not be responsible for providing parts due
to damage to a Machine that resulted from or involved the negligence or willful,
wanton, reckless or intentional conduct of the Operator or an employee, agent or
other representative of the Operator.
9. Cage Cash. At the time of execution of this Agreement, the Company
----------
loaned to the Operator "cage cash" at the Existing Locations which in the
aggregate totalled $70,000. The total amount of such "cage cash" loaned to the
Operator is evidenced by an unsecured promissory note (the "Note") which accrues
interest at the prime interest rate (as quoted in the Wall Street Journal)
-------------------
plus 2% per annum. The principal and interest on the Note is due in full six
3
<PAGE>
months after the date of this Agreement, without notice. The Note may be
prepaid at any time without penalties. The Note is personally guaranteed by
Michael W. Mims and Danny C. Dye, jointly and severally.
10. Leases and Subleases.
----------------------
a. Effective as of the date of execution of this Agreement, the Operator
subleased from ABG or a subsidiary of ABG those Existing Locations which are
leased by ABG or a subsidiary of ABG as noted on Exhibit B attached hereto. The
terms and conditions of the subleases are comparable to the terms of the lease
agreements for such properties; provided, however, the monthly rents for the
subleases are as follows: (i) for the Charleston area locations identified as
Gold Strike/Lucky I, Ponderosa and Beacon I, the monthly rent is equal to $100
multiplied by the number of Machines operated at the respective location during
the month, but in no event less than the number of Machines operated at the
respective location on the date of execution of this Agreement, which monthly
rent per Machine shall increase at each anniversary date of the respective
sublease by the consumer price index for the applicable region for the prior
twelve-month period plus one percent; and (ii) for the Augusta area locations
identified as Lucky 4, Double 7/Wild Cherry and Golden Palace, the monthly rent
is equal to the monthly rent set forth in the underlying lease agreement for
each such location. The Operator hereby agrees that it will not take any action,
or fail to take any action, which in any way may jeopardize the effectiveness of
any of the leases underlying these subleases. In addition, ABG and the Company
each agree that they will take all reasonable efforts to obtain the necessary
consents required for these respective locations to be subleased to the Operator
under the existing underlying leases, and to maintain and preserve the leases
underlying these subleases. Upon termination of the lease underlying a sublease,
it is understood that the respective sublease will also terminate and that
accordingly this Agreement will terminate with respect to that respective
Existing Location.
b. Effective as of the date of execution of this Agreement, the Operator
leased from ABG or a subsidiary of ABG the Existing Location at 1470 Charleston
Highway in West Columbia, South Carolina. The Operator and ABG or its
subsidiary, as applicable, entered into a lease agreement for this location. The
monthly rent for this lease is equal to $100 multiplied by the number of
Machines operated at the location during the month, but in no event less than
the number of Machines operated at the location on the date of execution of this
Agreement, which monthly rent per Machine shall increase at each anniversary
date of the lease by the consumer price index for the applicable region for the
prior twelve-month period plus one percent.
c. The Operator is also leasing from the Company the furniture, fixtures
and equipment, excluding the Machines and the machine licenses (the "Personal
Property"), at the respective Locations as of the date of execution of this
Agreement. For the six locations which are subleased by the Operator, as noted
in Section 10.a. above, and the one location which is leased by the Operator, as
noted in Section 10.b. above, the Personal Property being leased is listed on an
4
<PAGE>
exhibit attached to the respective subleases and lease. For the Southern Sport
location in North Augusta, the Personal Property being leased is set forth on
Exhibit C attached hereto. The Operator is responsible for all maintenance,
service and repairs that are reasonable and customary for the Operator's
business to keep the Personal Property in good repair and working order,
ordinary wear and tear excepted, during the term of this Agreement, including
but not limited to replacing any Personal Property that is destroyed or damaged
such that it cannot be repaired. The Operator is also responsible for paying
taxes and maintaining insurance on the Personal Property during the term of this
Agreement. The Operator acknowledges and agrees that it is receiving the
Personal Property "as is" and that the Company and ABG are not providing any
representations or warranties regarding the condition of the Personal Property
or the performance of such Personal Property during the term of this Agreement.
In addition, the parties expressly agree that the Company and ABG will not be
liable or responsible for any defects or deficiencies related to the Personal
Property.
d. The Operator shall reimburse ABG, or its respective subsidiary, for the
cost of utilities at each leased and subleased Location, as set forth in each
respective sublease agreement and lease agreement.
e. All monthly lease and sublease payments by the Operator shall be
received by ABG no later than the first day of the respective month without
notice. With respect to the Operator's payment of its pro rata share of fire
insurance and real estate taxes for certain Locations where applicable, the
Company shall provide the Operator with notice of the Operator's pro rata amount
of such expenses and the due date for such payment to the Company.
f. The lease and all of the subleases shall immediately terminate upon
termination of this Agreement.
11. Employee Nonsolicitation. The Operator agrees that during the term of
--------------------------
this Agreement and for six months after the termination of this Agreement the
Operator and its subsidiaries and affiliates will not, directly or indirectly,
without the Company's prior written consent, employ or solicit the employment of
any person who is employed by ABG or any subsidiary or affiliate of ABG while
such person is employed by ABG and/or its subsidiaries or affiliates, and for a
period of six months after such person has terminated employment with, or has
been terminated from employment with, ABG and/or any of its subsidiaries or
affiliates.
12. Escrow. Upon execution of this Agreement, the shareholders of the
------
Operator provided the Company with shares of ABG common stock equal to $200,000
based on the closing price of the stock on the business day prior to the date of
execution of this Agreement, which stock shall be held in escrow during the term
of this Agreement. In addition, 2% of the total gross revenues after payouts of
winnings on all Machines in the Existing Locations to be paid to the Company
during the first twelve months of this Agreement shall also be held in escrow
during the term of this Agreement. The purpose of this escrow is to provide
security to the Company and ABG for any liabilities of the Operator for which a
third party could reasonably be expected to seek to recover from ABG or the
Company ("Liabilities"), and as a means to compensate the Company and ABG in
5
<PAGE>
the event there is a deficiency or penalty relating to any Machine supplied to
the Operator pursuant to this Agreement issued by any regulatory or enforcement
authority as a result of the action or failure to act of the Operator which
deficiency or penalty could reasonably be expected to, or actually does, result
in a fine or penalty, the revocation or termination of the license for such
Machine, or the seizure of such Machine ("Deficiencies"). The Company or ABG
may pay such fines and penalties directly out of the escrowed funds in the event
any such fine or penalty of the Operator is not paid timely by the Operator,
unless the Operator has diligently protested such fine or penalty in good faith.
Upon termination of this Agreement, an audit or review of the Operator shall be
performed and an audit or review report (the "Report") issued within sixty days
after the date of termination of this Agreement. If, the audit or review
reveals that there are no outstanding Liabilities or Deficiencies, the remaining
shares of ABG common stock held in escrow shall be returned to the registered
owners of such stock and the remaining cash balance held in escrow shall be
returned to the Operator not later than the close of business on the fifth
business day following the issuance of the Report; provided, however, if ABG's
Chief Executive Officer believes such action should be approved by ABG's Board
of Directors, the cash and stock shall be returned as soon as ABG's Board can
meet or otherwise take action to approve the return of the cash and stock.
However, if such audit or review reveals that there are any such Liabilities or
Deficiencies, then the Company may continue to hold in escrow an amount of stock
and cash sufficient to provide for such Liabilities and Deficiencies. In the
event the value of the cash and stock held in escrow exceeds the estimated
liability for such Liabilities and Deficiencies, then the Company shall first
release stock from escrow and then cash from escrow to reduce the value in
escrow to approximate the estimated liability for such Liabilities and
Deficiencies. To the extent additional Liabilities or Deficiencies are
identified after the completion of the audit or review, sufficient cash and/or
stock shall be retained in the escrow to provide for such additional Liabilities
and Deficiencies. The escrow shall be decreased from time to time as
Liabilities and/or Deficiencies are resolved, but only to the extent that the
escrow exceeds the remaining identified Liabilities and Deficiencies. The
escrow shall be maintained until such time as all identified Liabilities and
Deficiencies are resolved. Regardless of the existence of the escrow, the
Operator shall remain liable for all such Liabilities and Deficiencies.
13. Inspection of Records and Locations. The Operator shall make available
-------------------------------------
to the Company, or its designated representatives, all records and information
necessary for the Company to audit and confirm the amount of the proceeds paid
to the Company pursuant to the terms of this Agreement. In addition, the
Company, or its designated representatives, shall have the right to enter any of
the Locations at any time to inspect the Machines or read the video game
meters.
14. License to Use Trade Name. The Company hereby grants to the Operator a
---------------------------
license to use the trade name "Gold Strike" during the term of this Agreement at
all of the Locations, to the extent the Company has any rights to the use of
such trade name. By granting this license, the Company is not providing any sort
of assurance or representation that it actually has any right to use such trade
name. This license does not grant the Operator any right to use any other
corporate name of ABG, the Company or any of their subsidiaries or affiliates
and the Operator is expressly prohibited from using the corporate names of ABG
6
<PAGE>
or any of its subsidiaries or affiliates or in any way implying that any of such
entities are in any way involved in the ownership, management or operation of
any of the Locations.
15. Insurance. The Operator shall maintain insurance, as the primary
---------
insured party, in connection with the operation of its business at the Locations
which is reasonable and customary for such business, including, but not limited
to, fire and casualty insurance, commercial property insurance, commercial
general liability insurance, and workers' compensation insurance. The Company
and ABG shall be additional named insured parties under such insurance policies.
16. Relationship of the Parties. Nothing contained in this Agreement shall
-----------------------------
be deemed to constitute a relationship of agency, joint venture, partnership or
any other relationship between the parties other than that specified. The
Operator certifies that it is not a party to, nor does it have a covenant or
restriction with, any other party in connection with any coin machine agreement,
lease and/or service agreement which may conflict with the Operator's
obligations and duties under this Agreement, and the Operator will not enter
into any such restrictive agreement without the prior written consent of the
Company.
17. Breach by Operator.
---------------------
a. In the event the Operator breaches (i) the exclusivity provision of
Section 1 of this Agreement by placing the Machine of another supplier in any
Location in which the Company's Machines are placed pursuant to this Agreement,
or (ii) the access to Machines provision of Section 13 of this Agreement by
refusing to grant the Company or its employees, agents or other representatives
access to any Machine during normal business hours, or (iii) its obligations to
pay money to the Company or ABG pursuant to this Agreement by making any such
payment more than three days late, then the Company shall provide the Operator
with notice of such breach. If there are two or more breaches of the type set
forth in (i) above during the term of this Agreement, or eleven or more breaches
of the type set forth in (ii) above during any twelve-month period, or five or
more breaches of the type set forth in (iii) above during any twelve-month
period, then in addition to any other remedy which may exist at law or in
equity, the Company and ABG may elect to terminate this Agreement in whole, or
partially terminate this Agreement by terminating it only with respect to the
Location to which the breach relates, terminate the related subleases and leases
and remove the Machines from all of the Locations, or only the Location with
respect to which this Agreement is terminated in part, without interference from
the Operator and shall be entitled to damages of a sum equal to the cost of the
unexpired portion of the license on each such Machine, plus the Company's
portion of the average weekly total gross revenue after payouts of winnings for
each such Machine multiplied by the number of weeks that each such Machine is
out of service as a result of such termination, in whole or in part, of this
Agreement; provided, however, in the event the Company and ABG elect to
7
<PAGE>
terminate this Agreement in whole, such damages shall be limited to the damages
related to the Location or Locations at which the breach occurred. The average
weekly total gross revenue after payouts of winnings for each Machine shall be
calculated based upon the respective Machine's actual activity for the ten week
period prior to such breach. The parties acknowledge and agree that a surprise
inspection of the Machines at a time other than during normal business hours at
which the Company is unable to access the Machines will not be deemed a breach
under (ii) above; provided, however, the Operator must take all reasonable
efforts to comply with the Company's requests to grant the Company access to the
Machines.
b. If the Operator breaches any other obligation under this Agreement, the
Operator shall have 15 days to cure such breach following written notice of such
breach; provided, however, that if the breach cannot be cured with due diligence
within such 15-day period but the Operator commences to cure such breach within
such period, the time within which to cure the breach shall be extended for such
period as may be necessary to complete the curing of the same with all due
diligence. If the Operator fails to cure its breach within the cure period, (i)
the Company and ABG may take any action at law or in equity as may be necessary
or desirable to enforce observance or performance of the obligation of the
Operator under this Agreement and (ii) if the breach materially adversely
affects the benefits to be received by the Company or ABG under this Agreement,
the Company and ABG may terminate this Agreement in whole, or partially
terminate this Agreement by terminating it only with respect to the Location to
which the breach relates, upon giving written notice of termination to the
Operator.
18. Breach by Company or ABG. If the Company or ABG breaches any obligation
-------------------------
under this Agreement, the Company or ABG shall have 15 days to cure such breach
following written notice of such breach; provided, however, that if the breach
cannot be cured with due diligence within such 15-day period but the Company or
ABG commences to cure such breach within such period, the time within which to
cure the breach shall be extended for such period as may be necessary to
complete the curing of the same with all due diligence. If the Company or ABG
fails to cure its breach within the cure period, (i) the Operator may take any
action at law or in equity as may be necessary or desirable to enforce
observance or performance of the obligation of the Company and ABG under this
Agreement and (ii) if the breach materially adversely affects the benefits to be
received by the Operator under this Agreement, the Operator may partially
terminate this Agreement by terminating it only with respect to the Location to
which the breach relates upon giving written notice of termination to the
Company and ABG.
19. Indemnification.
----------------
a. The Operator agrees to indemnify, defend and hold harmless the Company,
ABG and all of their subsidiaries, affiliates, agents, employees, assigns and
other related parties against any and all liabilities, claims, damages, losses,
expenses, costs or actions, including but not limited to legal fees and
expenses, which are incurred due to the Operator's negligence, action or
inaction which results in a violation of any law, regulation, rule or ordinance
or which otherwise is detrimental to the Company in connection with this
Agreement. The indemnification provided by the Operator pursuant to this
provision shall not exceed $300,000, subject to the following two exceptions:
(i) there shall be no limitation on the amount of the indemnification provided
in the event such liabilities, claims, damages, losses, expenses, costs or
actions, including but not limited to legal fees and expenses, are the result of
any criminal charge or conviction involving Mims, Dye, or the Operator, or any
of its employees, agents or other representatives; and (ii) in the event
8
<PAGE>
such liabilities, claims, damages, losses, expenses, costs or actions, including
but not limited to legal fees and expenses, are the result of any willful,
intentional action by Mims, Dye, or the Operator, or any of its employees,
agents or other representatives, the indemnification provided hereunder shall be
limited to $500,000 if such willful, intentional action occurred during the
first twelve months of this Agreement and $400,000 if such willful, intentional
action occurred during the second twelve months of this Agreement.
b. The Company and ABG agree to indemnify, defend and hold harmless the
Operator and all of its subsidiaries, affiliates, agents, employees, assigns and
other related parties against any and all liabilities, claims, damages, losses,
expenses, costs or actions, including but not limited to legal fees and
expenses, which are incurred due to the Company's or ABG's negligence, action or
inaction which results in a violation of any law, regulation, rule or ordinance
or which otherwise is detrimental to the Operator in connection with this
Agreement. The indemnification provided by the Company and ABG pursuant to this
provision in the aggregate shall not exceed $300,000; provided, however, in the
event such liabilities, claims, damages, losses, expenses, costs or actions,
including but not limited to legal fees and expenses, are the result of any
willful, intentional action by the Company or ABG, or any of their employees,
agents or other representatives, the indemnification provided hereunder shall be
limited to $500,000 if such willful, intentional action occurred during the
first twelve months of this Agreement and $400,000 if such willful, intentional
action occurred during the second twelve months of this Agreement.
c. This Section 19 shall survive the termination of this Agreement.
20. Noncompete. The Operator, and its subsidiaries and affiliates, and Mims
-----------
and Dye hereby agree to the following noncompete provisions:
a. For a period of six months following the execution of this Agreement,
such parties shall not engage in the video gaming business as it relates to
route operations anywhere within South Carolina.
b. For a period of five years following the execution of this Agreement,
such parties shall not compete with any gaming route operation of the Company,
ABG or any of their subsidiaries or affiliates by in any way attempting to place
Machines in any route location at which Machines are being provided as of the
date of this Agreement by the Company, ABG or any of their subsidiaries or
affiliates.
c. For a period of five years following the execution of this Agreement,
such parties shall not engage in the business of operating, owning, managing,
supervising, promoting, providing consulting services to, or otherwise
participating in a bingo gaming facility in Alabama, Florida, Georgia, Kentucky,
9
<PAGE>
Maryland, Mississippi, Montana, Nevada, New York, South Carolina, or Texas;
provided, however, this shall not prohibit the Operator, Mims or Dye from
operating a bingo gaming facility pursuant to a "Class C" bingo license, as that
term is defined in Section 12-21-4020 of the South Carolina Code, issued by the
State of South Carolina, or a comparable bingo license issued by any other
jurisdiction.
d. With respect to Mims, the provisions of this Section 20 shall not apply
to businesses operated by Mims Amusement Company Partnership, Mims Amusement
Operating Co., Palmetto State Distributing Company, Inc., or Universal Mortgage
and Loan Co. (collectively, the "Mims Businesses"), provided that within the
twelve month period immediately preceding the date of this Agreement Mims has
had, and during the term of this noncompete Mims shall have, no role, directly
or indirectly, in management or operations of any of the Mims Businesses, nor
shall Mims receive any payment or distribution of any kind, as compensation or
otherwise, from any such business other than dividends upon corporate stock
which are strictly proportional to the percentage of stock owned by him, or
distributions with respect to his capital accounts in partnerships which are
strictly proportional to the percentage of his capital account ownership in any
such partnership. However, if, due to the death or legal incapacity of Mims'
father and the inability or refusal of Mims' brother to manage any of the Mims
Businesses, Mims becomes active in managing one or more of the Mims Businesses,
Mims agrees that for a period of five years following the execution of this
Agreement the Mims Businesses in which Mims is active in management will not
compete with the Company, ABG or any of their subsidiaries or affiliates by in
any way attempting to place Machines in any route location at which Machines are
being provided by the Company, ABG or any of their subsidiaries or affiliates,
and the Company and ABG agree that for such five-year period the Company, ABG
and their subsidiaries and affiliates will not compete with any of the Mims
Businesses in which Mims is active in management by in any way attempting to
place Machines in any route location at which Machines are being provided by any
Mims Businesses in which Mims is active in management.
e. The parties hereto expressly agree that the noncompete provisions of
this Section 20 shall not apply to businesses operated by Edgefield Plaza
Associates ("Edgefield") at the real property located at 1297 Martintown Road in
Edgefield County, South Carolina, and in connection herewith Mims, as a general
partner of Edgefield, hereby agrees that before Edgefield shall enter into
leases for any of the twelve rooms for which Mims has authority and control for
leasing at such real property, the Company shall have the first option to enter
into a coin machine agreement with any such lessee whereby the Company shall
supply the lessee with the Machines to be operated on such property, on terms to
be agreed by the lessee and the Company. In addition, if Edgefield, or its
subsidiaries or affiliates, intends to operate a video gaming business at any of
the twelve rooms for which Mims has authority and control for leasing at such
real property, the Company shall have the first option to enter into a coin
machine agreement with Edgefield whereby the Company shall supply Edgefield with
the Machines to be operated on such property, on terms to be agreed by Edgefield
and the Company.
10
<PAGE>
f. ABG and Mims mutually agree to terminate Section 8 of the Employment
Agreement dated September 24, 1997, as amended July 27, 1998, by and between ABG
and Mims; provided, however, Section 8.1 of such Employment Agreement, and the
other provisions of Section 8 of such Employment Agreement to the extent such
other provisions are relevant to Section 8.1, shall survive this termination of
Section 8 of the Employment Agreement. The Company, ABG and Mims also mutually
agree to terminate Article XI of the Agreement and Plan of Reorganization by and
among such parties dated August 13, 1997.
g. In the event of a breach by the Operator, or any of its subsidiaries or
affiliates, or Mims or Dye of any provision of this Section 20, the Company and
ABG shall have, in addition to any other remedies that they may have at law or
under this Agreement, the right to a temporary restraining order, temporary
injunction and permanent injunction restraining such person or entity from
violating or continuing a violation of the terms of this Section. The Operator,
Mims and Dye agree that in the event of such a breach, the amount of damages
would be difficult or impossible to determine, and as a result, in the event of
a breach by them they agree to a bond in the amount to be determined by a court
of competent jurisdiction.
h. Should any court of competent jurisdiction hold any portion of this
Section 20 to be unenforceable in whole or in part, such court shall be
authorized and requested to sever the offending provision from this Section, and
to reform this Section so as to comply as closely as possible with the
intentions of the parties as stated herein, so that it will be enforceable by
injunction.
i. This Section 20 shall survive the termination of this Agreement.
21. Impacts of Judicial, Legislative or Regulatory Actions. If during the
---------------------------------------------------------
term of this Agreement the South Carolina legislature enacts legislation or the
South Carolina Supreme Court definitively (after all applicable appeals) issues
a ruling and as a result of such legislation or ruling (a) game rooms of the
nature operated by the Operator become illegal, and the Operator cannot
reasonably modify its operations to bring its operations into compliance with
the legal requirements, thereby resulting in the Operator being forced to
discontinue its operations or (b) the primary and substantial portion of the
revenue from any Location must come from non-video poker operations thereby
making it impossible or unreasonable for the Operator to modify its operations
to bring its operations into compliance with the legal requirements, then the
Operator or ABG and the Company may terminate this Agreement upon notice to the
other party. Likewise, if during the twelve-month period preceding each July 1
during the term of this Agreement, beginning July 1, 1999, there is a change in
the tax rate on revenues from video gaming operations or other rules or
regulations governing video gaming activities that materially impacts the
profitability to the Operator or to ABG and the Company of operating their
respective businesses pursuant to this Agreement, the party whose profitability
is so impacted may terminate this Agreement by giving notice to the other party
not later than July 10 of such year, which notice shall include a detailed
statement of the reasons and support for such termination.
11
<PAGE>
22. Binding Effect. This Agreement shall be binding upon and inure to the
----------------
benefit of the parties hereto and their respective successors and assigns.
23. Assignment. This Agreement and the rights and duties hereunder are not
-----------
assignable or transferable by the Operator without the prior written consent of
the Company and ABG, which consent will not be granted unless, among other
things, such assignee is determined, in the sole discretion of the Company and
ABG, to be qualified as to experience and character. This Agreement and the
rights and duties hereunder are freely assignable by the Company and ABG.
24. Waiver. Any failure on the part of any party hereto to comply with any
-------
of its obligations, agreements or conditions hereunder may be waived by any
other party to whom such compliance is owed. No waiver of any provision of this
Agreement shall be deemed, or shall constitute, a waiver of any other provision,
whether or not similar, nor shall any waiver constitute a continuing waiver.
25. Entire Agreement. This Agreement constitutes the entire agreement among
-----------------
the parties hereto and supersedes and cancels any prior agreements,
representations, warranties, or communications, whether oral or written, among
the parties hereto relating to the transactions contemplated hereby or the
subject matter herein. Neither this Agreement nor any provision hereof may be
changed, waived, discharged or terminated, except in writing signed by the party
against whom or which the enforcement of such change, waiver, discharge or
termination is sought.
26. Severability. In the event that any provision of this Agreement or any
-------------
word, phrase, clause, sentence or other portion thereof should be held to be
unenforceable or invalid for any reason, such provision or portion thereof shall
be modified or deleted in such a manner so as to make this Agreement as modified
legal and enforceable to the fullest extent permitted under applicable laws.
27. Notices. All notices, requests, demands and other communications
--------
hereunder shall be in writing and shall be delivered by hand with a signed
receipt, by registered or certified mail, return receipt requested, postage
prepaid, by a recognized overnight courier, or by facsimile transmission with
the original sent by mail on that same day, addressed as follows:
If to the Company or ABG:
American Bingo & Gaming Corp.
1440 Charleston Highway
West Columbia, SC 29169
Attention: Chief Executive Officer
and to:
12
<PAGE>
Nelson Mullins Riley & Scarborough, L.L.P.
1330 Lady Street, Third Floor, Keenan Building
P. O. Box 11070 (29211)
Columbia, SC 29201
Attention: Daniel J. Fritze, Esq.
If to the Operator:
Mims & Dye Enterprises, LLC
2605-C Seminole Road
Columbia, SC 29210
Attention: Mr. Michael W. Mims
and to:
McNair Law Firm, P.A.
P. O. Box 11390
Columbia, SC 29201
Attention: John W. Currie, Esq.
If delivered personally, the date on which a notice, request, instruction
or document is delivered shall be the date on which such delivery is made and,
if delivered by mail, courier or facsimile, the date on which such notice,
request, instruction or document is received shall be the date of delivery. Any
party hereto may change its address specified for notices herein by designating
a new address by notice in writing in accordance with this Section.
28. Governing Law. This Agreement shall be governed by and construed in
---------------
accordance with the laws of the State of South Carolina, without regard to
choice of law principles.
29. Counterparts. This Agreement may be executed in two or more
-------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
30. Arbitration. Except to the extent preempted by the Federal Arbitration
------------
Act, 9 U.S.C. 1 et seq. (1970), any claim or controversy arising out of, or
-- ---
relating to, any provision of this Agreement or the breach thereof shall, upon
written demand of any party, be settled by a panel of three arbitrators in
accordance with the Commercial Arbitration Rules then in effect of the American
Arbitration Association to the extent consistent with the laws of the State of
South Carolina and the Uniform Arbitration Act, S.C. Code 15-48-10, et seq.,
-- ---
(Law. Co-Op. 1976, as amended). Judgment rendered by the arbitrators may be
entered in the appropriate Court in Richland County, South Carolina, having
jurisdiction thereof. Arbitration shall be held in the County of Richland,
State of South Carolina.
13
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Master Coin Machine
Agreement to be executed as of the date first above written.
GOLD STRIKE, INC.
By: /s/ George M. Harrison, Jr.
--------------------------
Name: George M. Harrison, Jr.
--------------------------
Title: VP
--------------------------
AMERICAN BINGO & GAMING CORP.
By: /s/ George M. Harrison, Jr.
--------------------------
Name: George M. Harrison, Jr.
--------------------------
Title: VP
--------------------------
MIMS & DYE ENTERPRISES, LLC
By: /s/ Michael W. Mims
--------------------------
Name: Michael Mims
--------------------------
Title: Member
--------------------------
/s/ Michael W. Mims
-----------------------------
Michael Mims
-----------------------------
As to Sections 9 and 20 Only
/s/ Danny C. Dye
-----------------------------
Danny C. Dye
As to Sections 9 and 20 Only
14
<PAGE>
EXHIBIT A
EXISTING LOCATIONS
Charleston Area:
- ----------------
Gold Strike/Lucky I
Ponderosa
Beacon I
North Augusta Area:
- --------------------
Double 7/Wild Cherry
Golden Palace
Lucky 4
Southern Sport
Columbia Area:
- --------------
Charleston Highway
<PAGE>
EXHIBIT B
LEASED AND SUBLEASED LOCATIONS
Charleston Area:
- ----------------
Gold Strike/Lucky I - subleased
Ponderosa - subleased
Beacon I -subleased
North Augusta Area:
- --------------------
Double 7/Wild Cherry - subleased
Golden Palace - subleased
Lucky 4 - subleased
Columbia Area:
- --------------
Charleston Highway -leased
<PAGE>
EXHIBIT C
PERSONAL PROPERTY FOR SOUTHERN SPORT LOCATION
5 Bar stools
2 Regular chairs
1 Table
2 Calculators
2 Cameras
1 VCR
1 Monitor
9 Wastebaskets
1 Time clock
1 Coffee pot
1 Microwave
<PAGE>
PROMISSORY NOTE
Date: November 9, 1998
Maker: Mims & Dye Enterprises, LLC
Maker's Mailing Address (including county):
2605-C Seminole Road
Columbia, Richland County, SC 29210
Payee: Gold Strike, Inc.
Place for Payment (including county):
1440 Charleston Highway
West Columbia, Lexington County, SC 29169
Principal Amount:
SEVENTY THOUSAND AND NO/100 DOLLARS ($70,000.00)
Annual Interest Rate on Unpaid Principal:
Prime interest rate (as quoted in the Wall Street Journal) plus two
-------------------
percent (2%) per annum.
Terms of Payment (principal and interest):
Except as otherwise provided herein, all principal and accrued
interest on this Promissory Note shall be due and payable in full six
months after the date of this Promissory Note, without notice.
Guaranty of Payment:
This Promissory Note is personally guaranteed by Michael W. Mims and
Danny C. Dye, jointly and severally, as set forth in the Guaranty
Agreement executed on the date hereof (the "Guaranty Agreement").
Maker promises to pay to the order of Payee at the place for payment and
according to the terms of payment the principal amount plus interest at the rate
stated above.
If the Master Coin Machine Agreement by and between Maker, Payee, American
Bingo & Gaming Corp. and Michael W. Mims and Danny C. Dye dated as of the date
hereof is terminated for any reason, the unpaid principal balance and accrued
interest on this Promissory Note shall immediately become due and payable.
<PAGE>
If Maker defaults in the payment of this Promissory Note and such default
continues for three days after Payee gives Maker written notice of the default,
then Payee may declare the unpaid principal balance and accrued interest on this
Promissory Note immediately due and payable and Payee may elect to exercise all
rights under the Guaranty Agreement.
If this Promissory Note or the Guaranty Agreement is given to an attorney
for collection or enforcement, or if suit is brought for collection or
enforcement, or if it is collected or enforced through probate, bankruptcy, or
other judicial proceeding, Maker shall pay Payee all costs of collection and
enforcement, including reasonable attorney's fees and court costs, in addition
to other amounts due.
Interest on the debt evidenced by this Promissory Note shall not exceed the
maximum amount of nonusurious interest that may be contracted for, taken,
reserved, charged, or received under law; any interest in excess of that maximum
amount shall be credited towards the principal of the debt or, if that has been
paid in full, refunded. On any acceleration or required or permitted
prepayment, any such excess shall be canceled automatically as of the
acceleration or prepayment or, if already paid, credited towards the principal
of the debt or, if the principal of the debt has been paid in full, refunded.
This provision overrides other provisions in this Promissory Note and all other
instruments concerning the debt.
Maker shall not assign or transfer this Promissory Note without the prior
written consent of Payee. Payee may freely assign, transfer, pledge or encumber
this Promissory Note.
Prepayment of principal and interest in whole or in part may be made at any
time without penalty.
The provisions of this Promissory Note are to be governed by and construed
according to the laws of the State of South Carolina.
MIMS & DYE ENTERPRISES, LLC
By: /s/ Michael W. Mims
-----------------
Name: Michael W. Mims
-----------------
Title: Member
-----------------
2
<PAGE>
GUARANTY AGREEMENT
WHEREAS, Mims & Dye Enterprises, LLC ("Debtor") has borrowed Seventy
Thousand Dollars ($70,000) (the "Obligations") from Gold Strike, Inc.
(collectively with its successors and assigns, "Creditor") pursuant to the terms
and conditions of the Master Coin Machine Agreement by and between Debtor,
Creditor, American Bingo & Gaming Corp. and Michael W. Mims and Danny C. Dye and
the Promissory Note (the "Promissory Note") executed by the Debtor, both of
which documents are dated as of the date of this Guaranty.
WHEREAS, the undersigned have agreed to guarantee, and by these presents do
agree to guarantee, payment to Creditor of the Obligations.
NOW, THEREFORE, KNOW ALL MEN BY THESE PRESENTS that for and in
consideration of the extension of credit, the undersigned, jointly and
severally, hereby absolutely and unconditionally guarantee to Creditor,
irrespective of the validity, regularity or enforceability of any instrument,
writing or arrangement relating to the Obligations and irrespective of any
present or future law or order of any government (whether of right or in fact)
or of any agency thereof purporting to reduce, amend, or otherwise affect the
Obligations or to vary the terms of payment, the prompt payment of the
Obligations when due now or hereafter, plus such interest or late charge as may
accrue thereon and such other costs and expenses as may be collectible by
Creditor under the Promissory Note. In addition, the undersigned agree, jointly
and severally, to pay the costs of collection, including expenses and fees to
attorneys or other third parties, paid or incurred by Creditor in collecting
and/or enforcing all or any part of the Obligations guaranteed hereunder. If
Creditor renews or otherwise extends the due date for payment of all or part of
the Obligations or otherwise modifies any terms of the Promissory Note, the
undersigned, jointly and severally, hereby guarantee prompt payment of the same
when due, according to each such extension or renewal or modification. The
within Guaranty is specifically understood and agreed to be a guaranty of
payment and not of collection.
The undersigned agree that whenever at any time or from time to time the
undersigned shall make any payment to Creditor hereunder on account of the
amount guaranteed hereunder, the undersigned will notify Creditor in writing
that such payment is made under this Guaranty for such purpose. No payment by
the undersigned pursuant to any provisions hereof shall entitle the undersigned
by subrogation or otherwise to the rights of Creditor to any payment by Debtor
or out of the property of Debtor, except after payment in full of the amount of
the Obligations plus the costs of collection as aforesaid.
The undersigned consent that the time or place of payment of the
Obligations may be changed or extended, in whole or in part, to a time certain
or otherwise, and may be renewed or accelerated in whole or in part; that Debtor
may be granted indulgences generally; that any of the terms of the Promissory
Note may be modified or waived; that any party liable for the payment thereof
(including but not being limited to any co-guarantor) may be granted indulgences
or released; that neither the death, bankruptcy, nor disability of any one or
more of the guarantors shall affect the continuing obligation of any other
guarantor, and that no claim need be asserted against the personal
1
<PAGE>
representative, guardian, trustee in bankruptcy, or receiver of any deceased,
incompetent, bankrupt, or insolvent guarantor; and that any deposit balance to
the credit of Debtor or any other party liable for the payment of the
Obligations may be released, in whole or in part, at, before, and/or after the
stated or extended due date of the Obligations, all without releasing the
undersigned and without notice to or further assent by the undersigned, who
shall remain bound thereon, notwithstanding any such exchange, compromise,
surrender, extension, renewal, acceleration, modification, indulgence, or
release.
Each of the undersigned represent to Creditor that each is the beneficiary
of Debtor's financial success.
Creditor may assign, transfer, pledge or encumber this Guaranty or any of
its rights and powers hereunder with the Promissory Note. In the event of such
assignment, transfer, pledge or encumbrance, the assignee hereof or of such
rights and powers shall have the same rights and remedies as if originally named
herein in place of Creditor. Neither of the undersigned may assign this
Guaranty or any of their duties, obligations or liabilities hereunder without
the prior written consent of the Creditor.
This Guaranty and all rights, obligations, and liabilities arising
hereunder shall be construed according to the laws of the State of South
Carolina, without regard to choice of law principles. Unless the context
otherwise requires, all terms used herein which are defined in the Uniform
Commercial Code of South Carolina shall have the meanings therein stated.
The undersigned expressly waive: (a) notice of acceptance of this Guaranty
and of all extensions of credit to Debtor; (b) presentment and demand for
payment of the Obligations; (c) protest and notice of dishonor or of default to
the undersigned or to any other party with respect to the Obligations; (d) all
other notices to which the undersigned might otherwise be entitled; and (e)
demand for payment under this Guaranty.
This obligation and liability on the part of the undersigned shall be a
primary and not a secondary obligation and liability, payable immediately upon
demand without recourse first having been had by Creditor against Debtor or any
person or entity. The liability of the undersigned on this Guaranty shall be
direct and immediate, in addition to any and all other remedies which may be
available to Creditor at law or otherwise, and not conditioned or contingent
upon the pursuit of any remedies against Debtor or any other person, securities,
or liens available to Creditor, its successors, endorsees, or assigns. The
undersigned agree that Creditor may proceed simultaneously against Debtor, the
undersigned, or any of them, and Creditor's commencement of any such action
shall not be deemed to be an election of remedies. The undersigned waive any
right to require that an action be brought against Debtor or any other person or
to require that resort be had to any balance of any deposit account or credit on
the books of Creditor in favor of Debtor or any other person. Nothing except
payment to Creditor of the full amount of the Obligations, together with all
interest or late charges thereon and all other costs and expenses paid or
incurred by Creditor in collecting and/or enforcing the amount of the
Obligations, shall terminate the obligations of the undersigned to Creditor
incurred hereunder. Upon failure of the undersigned to pay immediately all
amounts due under this Guaranty upon demand as aforesaid, the undersigned agree,
2
<PAGE>
jointly and severally, to pay all costs of collection, including expenses and
fees to attorneys and third parties, reasonably paid or incurred by Creditor in
connection with the enforcement of this Guaranty.
The undersigned submit to the jurisdiction of the courts of the State of
South Carolina. The undersigned consent to the service of process in any such
action by certified or registered mail directed to the undersigned at the
address set forth in Exhibit A attached hereto and incorporated herein by
----------
reference and that any such service shall be complete three days after the same
shall have been posted as aforesaid. Such method shall be in addition to any
other method authorized by law.
This Guaranty may be executed in multiple counterparts, each of which shall
constitute an original and all of which shall constitute a single document.
Wherever possible, each provision of this Guaranty shall be interpreted in such
manner as to be effective and valid under applicable law, but if any provision
or portion of this Guaranty shall be prohibited, invalid, or otherwise
unenforceable, such provision or portion shall be ineffective to the extent of
such prohibition, invalidity, or unenforceability, without invalidating the
remainder of such portion or provision or the remaining provisions or portions
of this Guaranty.
IN WITNESS WHEREOF, this instrument has been duly executed by the
undersigned this 9th day of November, 1998.
IN THE PRESENCE OF:
/s/ Cynthia S. Turnipseed /s/ Michael W. Mims
- ---------------------------- ----------------------
Michael W. Mims
/s/ George M. Harrison, Jr.
- -------------------------------
/s/ Cynthia S. Turnipseed /s/ Danny C. Dye
- ---------------------------- -------------------
Danny C. Dye
/s/ George M. Harrison, Jr.
- -------------------------------
3
<PAGE>
EXHIBIT A
---------
ADDRESSES
Michael W. Mims
257 Amenity Road
Chapin, SC 29036
Danny C. Dye
325 Land-O-Pines
Moncks Corner, SC 29461
4
<PAGE>
PROMISSORY NOTE
Date: 2/18/99
Maker: Mims & Dye Enterprises, L.L.C.
Maker's Mailing Address:
Payee: American Bingo & Gaming Corp.
Place for Payment: American Bingo & Gaming
1440 Charleston Highway
W. Columbia, SC 29169
Principal Amount: $10,000.00
Annual Interest rate on unpaid Principal: 2% + Prime
Terms of Payment: Due May 9, 1999.
Maker promises to pay to the order of Payee at the place for payment and
according to the terms of payment the principal amount plus interest at the
rates stated above. All unpaid amounts shall be due by the final payment date.
If Maker is late by 4 days or more in the payment of this Promissory Note, the
Payee may declare the Maker in default. If the Maker fails in the performance
of any other obligation or instrument securing the Note for a period of (30)
days, or lessor period contained in such instruments, the Payee may declare the
Maker in default. After Payee gives Maker written notice of the default, then
Payee may declare the unpaid principal and balance and earned interest on this
Promissory Note immediately due. If the default continues for thirty (30) days
the Payee may also remove all equipment belonging to the Company without further
notice and exercise all rights and legal resources permitted by this Note and
any related agreement(s).
If this Promissory Note or any instrument securing it is given to an attorney
for collection or enforcement, or if suit is brought for collections or
enforcement, or if it is collected or enforced through probate, bankruptcy or
other judicial proceeding, the Maker shall pay Payee all costs of collection and
enforcement, including reasonable attorney's fees and court costs, in addition
to other amounts due.
Interest on the debt evidenced by this Promissory Note shall not exceed the
maximum amount of non-usurious interest that may be contracted for, taken,
reserved, charged or received under law; any interest in excess of that maximum
amount shall be credited towards the principal of the debt or, if that has been
paid, refunded. On any acceleration or required or permitted payment, any such
excess shall be canceled automatically as of the acceleration or prepayment or,
<PAGE>
if already paid, credited towards the principal of the debt or, if the principal
of the debt has been refunded. This provision overrides other provisions in
this and all other instruments concerning the debt.
Prepayment of principal and interest in whole or in part may be made at any time
without penalty. All obligations under this note and all related agreements are
personally and unconditionally guaranteed by the undersigned.
The Provisions of the Promissory Note are to be governed by and construed
according to the laws of the State of South Carolina.
/s/ Michael W. Mims
----------------------
Mims & Dye Enterprises
Witness: /s/ Marie Pierson
-------------------
This Note reflects a correction to a certain Promissory Note dated November
9, 1998 between the parties so as to reflect cage cash of a total of $80,000.
This Note represents $10,000 of the $80,000 and the Note dated November 9
represents $70,000.00 of the $80,000.00.
/s/ Michael W. Mims
----------------------
<PAGE>
AMERICAN BINGO & GAMING CORP.
STOCK PURCHASE WARRANT
THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF TEXAS. THESE SECURITIES MAY NOT
BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF
REGISTRATION, OR THE AVAILABILITY OF AN EXEMPTION FROM REGISTRATION.
FURTHERMORE, NO OFFER, SALE, TRANSFER, PLEDGE OR HYPOTHECATION IS TO TAKE PLACE
WITHOUT THE PRIOR WRITTEN APPROVAL OF COUNSEL OF THE ISSUER. THE STOCK TRANSFER
AGENT HAS BEEN ORDERED TO EFFECTUATE TRANSFERS OF THIS CERTIFICATE ONLY IN
ACCORDANCE WITH THE ABOVE INSTRUCTIONS.
This STOCK PURCHASE WARRANT (the "Warrant") is issued as of the 19th day of
March, 1998, by American Bingo & Gaming Corp., a Delaware corporation (herein
called the "Corporation"), to _______________________________________________
____________________________ (herein, together with its permitted transferees,
when appropriate, called the "Holder").
WITNESSETH:
----------
WHEREAS, the Corporation and Holder entered into a letter agreement, dated
February 6, 1998, pursuant to which the Corporation engaged Holder to provide
financial consulting and investment banking advice;
WHEREAS, pursuant to said letter agreement, the Corporation was obligated
to issue to Holder a warrant to purchase ___________ shares of the Corporation's
common stock, $0.01 par value (the "Common Stock");
WHEREAS, on February 6, 1998, the Board of Directors of the Corporation
(the "Board") authorized issuance to the Holder the warrant required by said
letter agreement;
WHEREAS, on March 19, 1998, the Holder transferred a portion of the warrant
pursuant to the terms thereof,
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained and other good and valuable consideration, the Corporation
hereby certifies as follows:
1. The Corporation hereby issues to the Holder a warrant to purchase,
subject to the terms and conditions hereinafter set forth, _____________ shares
of Common Stock (the "Shares") at a per share purchase price equal to $3.875
(the "Warrant Price").
2. The Warrant shall terminate at 5:00 p.m., Austin time, on February 5,
2004, unless sooner terminated pursuant to Paragraph 8 hereof.
<PAGE>
3. The Warrant shall vest and become fully exercisable on February 6, 1999.
4. The Shares may be purchased by delivering to the Secretary of the
Corporation from time to time a written notice specifying the number of Shares
that the Holder then desires to purchase, together with (i) payment of the
Warrant Price for such number of shares in the manner set forth in Paragraph 5
hereof and (ii) such other instruments or agreements duly signed by the Holder
as in the opinion of counsel for the Corporation may be necessary or advisable
in order that the issuance of such number of Shares shall comply with applicable
rules and regulations under the Securities Act of 1933 (the "Act"), any
appropriate state securities laws or any requirement of the National Association
of Securities Dealers, Inc. or any national securities exchange on which the
Common Stock may be traded. In such regard, the Corporation may require the
Holder to represent in writing that the Shares being acquired are for investment
purposes only and not with a view to distribution. As soon as practicable after
the purchase of Shares pursuant to the Warrant, in whole or in part, the
Corporation will deliver to the Holder a certificate for the number of Shares so
purchased, issued in the Holder's name. Such stock certificate shall carry such
appropriate legend, and such written instructions shall be given to the
Corporation's transfer agent, as may be deemed necessary or advisable by counsel
to the Corporation to satisfy the requirements of the Act or any state
securities laws. The Corporation shall not be required to issue or deliver any
certificates for Shares purchased pursuant to the Warrant prior to the obtaining
of any approval from any governmental agency that the Corporation shall, in its
sole discretion, determine to be necessary or advisable. In no event may a
fractional share of Common Stock be issued pursuant to the Warrant (before or
after any adjustment or substitution pursuant to Paragraph 7 or 8 hereof). If at
any time the Holder purchases less than the full number of Shares purchaseable
pursuant to this Warrant, the Corporation shall forward to Holder a replacement
warrant in the form hereof covering the number of Shares remaining subject to
this Warrant, unless the Warrant has terminated.
5. Payment of the Warrant Price for the Shares being purchased pursuant
hereto shall be made by delivery by the Holder to the Corporation of a cashier's
check payable in United States currency (unless a personal check shall be
acceptable to the Corporation) to the order of the Corporation.
6. Shares to be issued upon the exercise of the Warrant may, at the
election of the Corporation, be either authorized and unissued Common Stock, or
Common Stock previously issued and reacquired.
7. In the event that a dividend payable in shares of Common Stock shall be
hereafter declared upon the Common Stock, the number of Shares then subject to
the Warrant shall be adjusted by adding to each such Share the number of shares
that would be distributable thereon if such Share had been outstanding on the
date fixed for determining the shareholders entitled to receive such stock
dividend, and the Warrant Price shall be proportionately adjusted. In the event
that a stock split or reverse stock split shall be hereafter declared upon the
Common Stock, the number of Shares then subject to the Warrant shall be adjusted
by increasing or decreasing, as appropriate, the number of Shares, and the
Warrant Price shall be proportionately adjusted. In the event that the
outstanding Common Stock shall be changed into or exchanged for a different
number or kind of shares of stock or other securities of the Corporation or of
another corporation, whether through reorganization, recapitalization, stock
<PAGE>
split, combination of shares, merger or consolidation, then, subject to the
provisions of Paragraph 8 hereof, there shall be substituted for each Share the
number and kind of shares of stock or other securities into which each
outstanding share of Common Stock shall be so changed or for which each such
share shall be exchanged, and the Warrant Price of such stock or other
securities shall be proportionately adjusted. In the event there shall be any
change, other than as specified above, in the number or kind of outstanding
shares of Common Stock or of any stock or other securities into which Common
Stock shall have been changed or for which it shall have been exchanged, then if
the Board shall in good faith determine that such change equitably requires an
adjustment in the number or kind of shares then subject to the Warrant, such
adjustment shall be made by the Board and shall be effective and binding for all
purposes.
8. Notwithstanding the foregoing, if the Corporation is merged into or
consolidated with another corporation under circumstances where the Corporation
is not the surviving corporation or where the Corporation will be a wholly owned
subsidiary of another corporation, or if the Corporation sells or otherwise
disposes of all or substantially all its property or assets to another
corporation while the Warrant remains outstanding (a "Transaction"), the Warrant
may be terminated by the Board as of the effective date of any Transaction,
provided that (i) the Transaction results in a change of control of the
Corporation rather than a mere change of form or domicile of the Corporation,
(ii) written notice of such termination is given to the Holder not later than 30
days prior to the effective date of the Transaction, (iii) the Warrant shall
immediately vest, notwithstanding the vesting provisions of Paragraph 3 hereof,
and (iv) the Holder shall have the right to exercise the Warrant in full prior
to, or effective as of, the effective date of the Transaction.
9. The Holder shall not be or have any of the rights or privileges of a
stockholder of the Corporation in respect to any of the Shares unless and until
certificates representing the Shares shall have been issued and delivered to the
Holder.
10. Any notice relating to this Warrant shall be in writing and delivered
in person or by certified mail, return receipt requested, to the Corporation at
the Corporation's main office, 515 Congress Ave., Suite 1200, Austin, Texas
78701, or to such other address as may be hereafter specified by the
Corporation, to the attention of its Secretary. All notices to the Holder shall
be delivered to the Holder at the Holder's address set forth above.
11. Any payment or any issuance or transfer of Shares to the Holder or his
legal representative, heir, legatee or distributee, in accordance with the
provisions hereof, shall, to the extent thereof, be in full satisfaction of all
claims of such persons hereunder. The Board may require the Holder, or his legal
representative, heir, legatee or distributee, as a condition precedent to such
payment, issuance, or transfer, to execute a release and receipt therefor in
such form as the Corporation shall determine.
12. No provision of this Warrant may be waived, modified, amended,
abridged, supplemented or terminated except in writing by the Corporation with
the Holder's consent.
<PAGE>
13. This Warrant shall be governed by, and construed and enforced in
accordance with, the laws of the State of Texas applicable to contracts made and
performed within that state.
14. In the event of a dispute between the Corporation and the Holder with
respect to this Warrant or the Shares, the prevailing party shall be entitled to
recover reasonable attorneys' fees and expenses and any costs associated with
any such dispute.
15. In the event any provision of this Warrant shall be held to be illegal
or invalid for any reason, the illegality or invalidity shall not affect the
remaining provisions hereof, but shall be fully severable, and the Warrant shall
be construed and enforced as if the illegal or invalid provision had never been
included herein.
16. The Warrant may not be transferred or assigned in any manner by the
Holder, except (i) to persons who are officers, directors, or managing partners
of the initial Holder to whom the Warrant was issued; (ii) to persons who are
officers, directors, or managing partners of the corporation or partnership
owning all of such initial Holder's outstanding voting securities (the
"Parent"); (iii) to the successor in a merger or consolidation of such initial
Holder or the Parent; (iv) to the purchaser of all or substantially all of such
initial Holder's assets; (v) to such initial Holder's shareholders or partners
in the event it is liquidated or dissolved; (vi) by operation of law to a
Holder's heirs or devisees, or in the case of any estate or trust, its
distributees or beneficiaries; and (vii) pursuant to a domestic relations order.
The terms and provisions of this Warrant shall be binding upon the Holder and
its legal representatives, upon the Corporation, its successors and assigns, and
upon the Board and its successors.
IN WITNESS WHEREOF, the Corporation has caused this Warrant to be executed
in its name by its Chairman of the Board on the date and year first above
written.
AMERICAN BINGO & GAMING CORP.
By: ________________________
Greg Wilson
Chairman of the Board
<PAGE>
LIST OF PERSONS HOLDING WARRANTS PURSUANT TO
FORM OF STOCK PURCHASE WARRANT
Holder Number of Shares
---------------- ----------------
Gaines Berland 65,000
Peter Blum 14,000
Steven Blumberg 14,000
Lisa Evanchuk 7,000
-------
Total 100,000
=======
<PAGE>
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE SOLD, OFFERED FOR SALE,
TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF UNLESS IT HAS BEEN REGISTERED
UNDER THOSE LAWS OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL
SATISFACTORY TO IT THAT AN EXEMPTION FROM REGISTRATION UNDER EACH OF THOSE LAWS
IS AVAILABLE.
Right to Purchase _______ Shares of Common
Stock of American Bingo & Gaming Corp.
AMERICAN BINGO & GAMING CORP.
COMMON STOCK PURCHASE WARRANT
NO. ___
AMERICAN BINGO & GAMING CORP., a Delaware corporation (the "Company"),
hereby certifies that, for value received, _____________ or registered assigns
(the "Holder"), is entitled, subject to the terms set forth below, to purchase
from the Company at any time or from time to time after the date hereof, and
before 5:00 p.m., New York City time, on the Expiration Date (as hereinafter
defined), __________ fully paid and nonassessable shares of Common Stock at a
purchase price per share equal to the Purchase Price (as hereinafter defined).
The number of such shares of Common Stock and the Purchase Price are subject to
adjustment as provided in this Warrant.
As used herein the following terms, unless the context otherwise requires,
have the following respective meanings:
"Average Market Price" shall mean the arithmetic average of the Market
Price for the Common Stock for each Trading Day during the Measurement Period.
"Business Day" as used herein shall mean a day on which the New York Stock
Exchange is open for business.
"Common Stock" includes the Company's Common Stock, $.001 par value per
share, as authorized on the date hereof, and any other securities into which or
for which the Common Stock may be converted or exchanged pursuant to a plan of
recapitalization, reorganization, merger, sale of assets or otherwise.
"Company" shall include American Bingo & Gaming Corp. and any corporation
that shall succeed to or assume the obligation of American Bingo & Gaming Corp.,
hereunder in accordance with the terms hereof.
"Expiration Date" shall be determined as follows:
(a) If the Average Market Price of Common Stock during the
Measurement Period is less than $4.50 (subject to equitable adjustment as
described below), Expiration Date shall mean the date which follows the Issuance
<PAGE>
Date by the number of calendar days equal to the product obtained by multiplying
the Average Market Price times 100 days;
(b) If the Average Market Price of Common Stock during the Measurement
Period is equal to or greater than $4.50 (subject to equitable adjustment as
described below) and less than or equal to $7.50 (subject to equitable
adjustment as described below), Expiration Date shall mean the date that follows
the Issuance Date by the number of calendar days equal to the product obtained
by (i) multiplying the Average Market Price times 100 days and (ii) adding 365
days; and
(c) if the Average Market Price during the Measurement Period is
greater than $7.50 (subject to equitable adjustment as described below),
Expiration Date shall mean the third anniversary of the Issuance Date.
The prices indicated above shall be subject to equitable adjustment from time to
time on terms reasonable acceptable to the Holder for (i) stock splits, (ii)
stock dividends, (iii) combinations, (iv) capital reorganizations, (v) issuance
to all holders of Common Stock of rights or warrants to purchase shares of
Common Stock at a price per share less than the Market Price which would
otherwise be applicable, (vi) the distribution by the Company to all holders of
Common Stock of evidences of indebtedness of the Company or cash (other than
regular quarterly cash dividends), (vii) tender offers by the Company or an
subsidiary of the Company or other repurchases of shares of Common Stock on one
or more transaction which, individually or in the aggregate, result in the
purchase of more than 10% or the Common Stock outstanding and (viii) similar
events relating to the Common Stock, in each such case which occur during the
Measurement Period.
"Issuance Date" shall mean the first date of original issuance of this
Warrant.
"Market Price" of Common Stock on any Trading Day shall mean the closing
high bid price of such Common Stock on such Trading Day on the principal
securities exchange or other market on which such security is listed for
trading, as reported by such exchange or other market,
"Measurement Period" shall mean the period from July 7, 1997 to February
27, 1998.
"Other Securities" refers to any stock (other than Common Stock) and other
securities of the Company or any other person (corporate or otherwise) which the
Holder at any time shall be entitled to receive, or shall have received, on the
exercise of this Warrant, in lieu of or in addition to Common Stock, or which at
any time shall be issuable or shall have been issued in exchange for or in
replacement of Common Stock or Other Securities pursuant to Section 4.
"Purchase Price" shall mean $5.50, subject to adjustment as provided in
this Warrant.
<PAGE>
"Registration Rights Agreement" means the Registration Rights Agreement,
dated as of the date hereof, by and between the Company and the original Holder
of this Warrant, as amended from time to time in accordance with its terms.
"Trading Day" means a day on which either of the national securities
exchanges or Nasdaq which at the time constitutes the principal securities
market for the Common Stock is open for general trading.
1. EXERCISE OF WARRANT.
---------------------
1.1 EXERCISE. (a) This Warrant may be exercised by the Holder hereof
--------
in full or in part at any time or from time to time during the exercise period
specified in the first paragraph hereof until the Expiration Date by surrender
of this Warrant and the subscription form annexed hereto (duly executed by the
Holder), to the Company's transfer agent and registrar for the Common Stock, and
by making payment, in cash or by certified or official bank check payable to the
order of the Company, in the amount obtained by multiplying (a) the number of
shares of Common Stock designated by the Holder in the subscription form by (b)
the Purchase Price then in effect. On any partial exercise the Company will
forthwith issue and deliver to or upon the order of the Holder hereof a new
Warrant or Warrants of like tenor, in the name of the Holder hereof or as the
Holder (upon payment by the Holder of any applicable transfer taxes) may
request, providing in the aggregate on the face or faces thereof for the
purchase of the number of shares of Common Stock for which such Warrant or
Warrants may still be exercised.
(b) Notwithstanding any other provision of this Warrant, in no event
shall the Holder be entitled at any time to purchase a number of shares of
Common Stock on exercise of this Warrant in excess of that number of shares upon
purchase of which the sum of (1) the number of shares of Common Stock
beneficially owned by the Holder and all persons whose beneficial ownership of
shares of Common Stock would be aggregated with the Holder's beneficial
ownership of shares of Common Stock for purposes of Section 13(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Regulation
13D-G thereunder, (each such person other than the Holder a "Related Person" and
all such persons other than the Holder, collectively, the "Related Persons")
(other than shares of Common Stock deemed beneficially owned through the
ownership of the unexercised portion of this Warrant and any of the Company's
Series A Preferred Stock by the Holder and all Related Persons) and (2) the
number of shares of Common Stock issuable upon exercise of the portion of this
Warrant with respect to which the determination in this sentence is being made,
would result in beneficial ownership by the Holder and all Related Persons of
more than 4.9% of the outstanding shares of Common Stock. For purposes of the
immediately preceding sentence, beneficial ownership shall be determined in
accordance with Section 13(d) of the Exchange Act and Regulation 13D-G
thereunder, except as otherwise provided in clause (1) of the immediately
preceding sentence. For purposes of the second preceding sentence, the Company
shall be entitled to rely, and shall be fully protected in relying, on any
statement or representation made by the Holder to the Company in connection with
a particular exercise of this Warrant, without any obligation on the part of the
Company to make any inquiry or investigation or to examine its records or the
records of any transfer agent for the Common Stock.
<PAGE>
1.2 NET ISSUANCE. Notwithstanding anything to the contrary contained
-------------
in Section 1.1, the Holder may elect to exercise this Warrant in whole or in
part by receiving shares of Common Stock equal to the net issuance value (as
determined below) of this Warrant, or any part hereof, upon surrender of this
Warrant to the Company's transfer agent and registrar for the Common Stock the
principal office of the Company together with the subscription form annexed
hereto (duly executed by the Holder), in which event the Company shall issue to
the Holder a number of shares of Common Stock computed using the following
formula:
X = Y (A-B)
--------
A
Where: X = the number of shares of Common Stock to be issued to the Holder
Y = the number of shares of Common Stock as to which this Warrant
is to be exercised
A = the current fair market value of one share of Common Stock
calculated as of the last trading day immediately preceding the
exercise of this Warrant
B = the Purchase Price
As used herein, current fair market value of Common Stock as of a specified
date shall mean with respect to each share of Common Stock the average of the
closing sale price of the Common Stock on the principal securities market on
which the Common Stock may at the time be listed or, if there have been no sales
on any such exchange on such day, the average of the highest bid and lowest
asked prices on the principal securities market at the end of such day, or, if
on such day the Common Stock is not so listed, the average of the representative
bid and asked prices quoted in the Nasdaq System as of 4:00 p.m., New York City
time, or, if on such day the Common Stock is not quoted in the Nasdaq System,
the average of the highest bid and lowest asked price on such day in the
domestic over-the-counter market as reported by the National Quotation Bureau,
Incorporated, or any similar successor organization, in each such case averaged
over a period of five consecutive Business Days consisting of the day as of
which the current fair market value of a share of Common Stock is being
determined (or if such day is not a Business Day, the Business Day next
preceding such day) and the four consecutive Business Days prior to such day.
If on the date for which current fair market value is to be determined the
Common Stock is not listed on any securities exchange or quoted in the Nasdaq
System or the over-the-counter market, the current fair market value of Common
Stock shall be the highest price per share which the Company could then obtain
from a willing buyer (not a current employee or director) for shares of Common
Stock sold by the Company, from authorized but unissued shares, as determined in
good faith by the Board of Directors of the Company, unless prior to such date
the Company has become subject to a merger, acquisition or other consolidation
pursuant to which the Company is not the surviving party, in which case the
current fair market value of the Common Stock shall be deemed to be the value
received by the holders of the Company's Common Stock for each share thereof
pursuant to the Company's acquisition.
<PAGE>
2. DELIVERY OF STOCK CERTIFICATES, ETC., ON EXERCISE. As soon as
-------------------------------------------------------
practicable after the exercise of this Warrant, and in any event within three
Business Days thereafter, the Company at its expense (including the payment by
it of any applicable issue or stamp taxes) will cause to be issued in the name
of and delivered to the Holder hereof, or as the Holder (upon payment by the
Holder of any applicable transfer taxes) may direct, a certificate or
certificates for the number of fully paid and nonassessable shares of Common
Stock (or Other Securities) to which the Holder shall be entitled on such
exercise, in such denominations as may be requested by the Holder, plus, in lieu
of any fractional share to which the Holder would otherwise be entitled, cash
equal to such fraction multiplied by the then current fair market value (as
determined in accordance with subsection 1.2) of one full share, together with
any other stock or other securities any property (including cash, where
applicable) to which the Holder is entitled upon such exercise pursuant to
Section 1 or otherwise.
3. ADJUSTMENT FOR DIVIDENDS IN OTHER STOCK. PROPERTY, ETC.;
---------------------------------------------------------------
RECLASSIFICATION, ETC. In case at any time or from time to time, all the
- ----------------------
holders of Common Stock (or Other Securities) shall have received, or (on or
after the record date fixed for the determination of stockholders eligible to
receive) shall have become entitled to receive, without payment therefor,
(a) other or additional stock or other securities or property (other
than cash) by way of dividend, or
(b) any cash (excluding cash dividends payable solely out of earnings
or earned surplus of the Company), or
(c) other or additional stock or other securities or property
(including cash) by way of spin-off, split-up, reclassification,
recapitalization. combination of shares or similar corporate rearrangement,
other than additional shares of Common Stock (or Other Securities) issued as a
stock dividend or in a stock-split (adjustments in respect of which are provided
for in Section 5), then and in each such case the Holder, on the exercise hereof
as provided in Section 1, shall be entitled to receive the amount of stock and
other securities and property (including cash in the cases referred to in
subdivisions (b) and (c) of this Section 3) which the Holder would hold on the
date of such exercise if on the date thereof the Holder had been the holder of
record of the number of shares of Common Stock called for on the face of this
Warrant and had thereafter, during the period from the date hereof to and
including the date of such exercise, retained such shares and all such other or
additional stock and other securities and property (including cash in the case
referred to in subdivisions (b) and (c) of this Section 3) receivable by the
Holder as aforesaid during such period, giving effect to all adjustments called
for during such period by Section 4.
4. EXERCISE UPON REORGANIZATION, CONSOLIDATION, MERGER, ETC. In case
-----------------------------------------------------------
at any time or from time to time, the Company shall (a) effect a reorganization,
(b) consolidate with or merge into any other person, or (c) transfer all or
substantially all of its properties or assets to any other person under any plan
or arrangement contemplating the dissolution of the Company, then, in each such
case, as a condition of such reorganization, consolidation, merger, sale or
conveyance, the Company shall give at least 30 days notice to the Holder of such
pending transaction whereby the holder shall have the right to exercise this
<PAGE>
Warrant prior to any such reorganization, consolidation, merger, sale or
conveyance. Any exercise of this Warrant pursuant to notice under this Section
shall be conditioned upon the closing of such reorganization, consolidation,
merger, sale or conveyance which is the subject of the notice and the exercise
of this Warrant shall not be deemed to have occurred until immediately prior to
the closing of such transaction.
5. ADJUSTMENT FOR EXTRAORDINARY EVENTS. In the event that the Company
------------------------------------
shall (i) issue additional shares of the Common Stock as a dividend or other
distribution on outstanding Common Stock, (ii) subdivide or reclassify its
outstanding shares of Common Stock, or (iii) combine its outstanding shares of
Common Stock into a smaller number of shares of Common Stock, then, in each such
event, the Purchase Price shall, simultaneously with the happening of such
event, be adjusted by multiplying the Purchase Price in effect immediately prior
to such event by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to such event and the
denominator of which shall be the number of shares of Common Stock outstanding
immediately after such event, and the product so obtained shall thereafter be
the Purchase Price then in effect. The Purchase Price, as so adjusted, shall be
readjusted in the same manner upon the happening of any successive event or
events described herein in this Section 5. The Holder shall thereafter, on the
exercise hereof as provided in Section 1, be entitled to receive that number of
shares of Common Stock determined by multiplying the number of shares of Common
Stock which would be issuable on such exercise immediately prior to such
issuance by a fraction of which (i) the numerator is the Purchase Price in
effect immediately prior to such issuance and (ii) the denominator is the
Purchase Price in effect on the date of such exercise.
6. FURTHER ASSURANCES. The Company will take all action that may be
-------------------
necessary or appropriate in order that the Company may validly and legally issue
fully paid and nonassessable shares of stock, free from all taxes, liens and
charges with respect to the issue thereof, on the exercise of all or any portion
of this Warrant from time to time outstanding.
7. NOTICES OF RECORD DATE, ETC. In the event of
--------------------------------
(a) any taking by the Company of a record of the holders of any class of
securities for the purpose of determining the holders thereof who are entitled
to receive any dividend on, or any right to subscribe for, purchase or otherwise
acquire any shares of stock of any class or any other securities or property, or
to receive any other right, or
(b) any capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company or any transfer of all or
substantially all of the assets of the Company to or consolidation or merger of
the Company with or into any other person, or
(c) any voluntary or involuntary dissolution, liquidation or winding-up of
the Company,
then and in each such event the Company will mail or cause to be mailed to the
Holder, at least ten days prior to such record date, a notice specifying (i) the
date on which any such record is to be taken for the purpose of such dividend,
distribution or right, and stating the amount and character of such dividend,
distribution or right, (ii) the date on which any such reorganization,
reclassification, recapitalization, transfer, consolidation, merger,
<PAGE>
dissolution, liquidation or winding-up is to take place, and the time, if any is
to be fixed, as of which the holders of record of Common Stock (or Other
Securities) shall be entitled to exchange their shares of Common Stock (or Other
Securities) for securities or other property deliverable on such reorganization,
reclassification, recapitalization, transfer, consolidation, merger,
dissolution, liquidation or winding-up, and (iii) the amount and character of
any stock or other securities, or rights or options with respect thereto,
proposed to be issued or granted, the date of such proposed issue or grant and
the persons or class of persons to whom such proposed issue or grant is to be
offered or made. Such notice shall also state that the action in question or
the record date is subject to the effectiveness of a registration statement
under the Securities Act of 1933, as amended (the "Securities Act"), or a
favorable vote of stockholders if either is required. Such notice shall be
mailed at least ten days prior to the date specified in such notice on which any
such action is to be taken or the record date, whichever is earlier.
8. RESERVATION OF STOCK, ETC., ISSUABLE ON EXERCISE OF WARRANTS. The
--------------------------------------------------------------
Company will at all times reserve and keep available out of its authorized but
unissued shares of capital stock, solely for issuance and delivery on the
exercise of this Warrant, a sufficient number of shares of Common Stock (or
Other Securities) to effect the full exercise of this Warrant and the exercise,
conversion or exchange of any other warrant or security of the Company
exercisable for, convertible into, exchangeable for or otherwise entitling the
holder to acquire shares of Common Stock (or Other Securities), and if at any
time the number of authorized but unissued shares of Common Stock (or Other
Securities) shall not be sufficient to effect such exercise, conversion or
exchange, the Company shall take such action as may be necessary to increase its
authorized but unissued shares of Common Stock (or Other Securities) to such
number as shall be sufficient for such purposes.
9. TRANSFER OF WARRANT. This Warrant shall inure to the benefit of the
-------------------
successors to and assigns of the Holder. This Warrant and all rights hereunder,
in whole or in part, are registrable at the office or agency of the Company
referred to below by the Holder hereof in person or by his duly authorized
attorney, upon surrender of this Warrant properly endorsed.
10. REGISTER OF WARRANTS. The Company shall maintain, at the principal
--------------------
office of the Company (or such other office as it may designate by notice to the
Holder hereof), a register in which the Company shall record the name and
address of the person in whose name this Warrant has been issued. as well as
the name and address of each successor and prior owner of such Warrant. The
Company shall be entitled to treat the person in whose name this Warrant is so
registered as the sole and absolute owner of this Warrant for all purposes.
11. EXCHANGE OF WARRANT. This Warrant is exchangeable, upon the
---------------------
surrender hereof by the Holder hereof at the office or agency of the Company
referred to in Section 10, for one or more new Warrants of like tenor
representing in the aggregate the right to subscribe for and purchase the number
of shares of Common Stock which may be subscribed for and purchased hereunder,
each of such new Warrants to represent the right to subscribe for and purchase
such number of shares as shall be designated by said Holder hereof at the time
of such surrender.
<PAGE>
12. REPLACEMENT OF WARRANT. On receipt of evidence reasonably
------------------------
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of any such loss, theft or destruction of this
Warrant, on delivery of an indemnity agreement or security reasonably
satisfactory in form and amount to the Company or, in the case of any such
mutilation, on surrender and cancellation of this Warrant, the Company at its
expense will execute and deliver, in lieu thereof, a new Warrant of like tenor.
13. WARRANT AGENT. The Company may, by written notice to the Holder,
--------------
appoint an agent having an office in the United States of America, for the
purpose of issuing Common Stock (or Other Securities) on the exercise of this
Warrant pursuant to Section 1, exchanging this Warrant pursuant to Section 11,
and replacing this Warrant pursuant to Section 12, or any of the foregoing, and
thereafter any such issuance, exchange or replacement, as the case may be, shall
be made at such office by such agent.
14. REMEDIES. The Company stipulates that the remedies at law of the
--------
Holder in the event of any default or threatened default by the Company in the
performance of or compliance with any of the terms of this Warrant are not and
will not be adequate, and that such terms may be specifically enforced by a
decree for the specific performance of any agreement contained herein or by an
injunction against a violation of any of the terms hereof or otherwise.
15. NO RIGHTS OR LIABILITIES AS A STOCKHOLDER. This Warrant shall not
------------------------------------------
entitle the Holder hereof to any voting rights or other rights as a stockholder
of the Company. No provision of this Warrant, in the absence of affirmative
action by the Holder hereof to purchase Common Stock, and no mere enumeration
herein of the rights or privileges of the Holder hereof, shall give rise to any
liability of the Holder for the Purchase Price or as a stockholder of the
Company, whether such liability is asserted by the Company or by creditors of
the Company.
16. NOTICES, ETC. All notices and other communications from the
-------------
Company to the registered Holder shall be mailed by first class certified mail,
postage prepaid, at such address as may have been furnished to the Company in
writing by the Holder or at the address shown for the Holder on the register of
Warrants referred to in Section 10.
17. TRANSFER RESTRICTIONS. By acceptance of this Warrant, the Holder
----------------------
represents to the Company that this Warrant is being acquired for the Holder's
own account and for the purpose of investment and not with a view to, or for
sale in connection with, the distribution thereof, nor with any present
intention of distributing or selling the Warrant or the Common Stock issuable
upon exercise of the Warrant. The Holder acknowledges and agrees that this
Warrant and, except as otherwise provided in the Registration Rights Agreement,
the Common Stock issuable upon exercise of this Warrant (if any) have not been
(and at the time of acquisition by the Holder, will not have been or will not
be), registered under the Securities Act or under the securities laws of any
state, in reliance upon certain exemptive provisions of such statutes. The
Holder further recognizes and acknowledges that because this Warrant and, except
as provided in the Subscription Agreement, the Common Stock issuable upon
exercise of this Warrant (if any) are unregistered, they may not be eligible for
resale, and may only be resold in the future pursuant to an effective
registration statement under the Securities Act and any applicable state
<PAGE>
securities laws, or pursuant to a valid exemption from such registration
requirements. Unless the shares of Common Stock issuable upon exercise of this
Warrant have theretofore been registered for resale under the Securities Act,
the Company may require, as a condition to the issuance of Common Stock upon the
exercise of this Warrant (i) in the case of an exercise in accordance with
Section 1.1 hereof, a confirmation as of the date of exercise of the Holder's
representations pursuant to this Section 17, or (ii) in the case of an exercise
in accordance with Section 1.2 hereof, an opinion of counsel reasonably
satisfactory to the Company that the shares of Common Stock to be issued upon
such exercise may be issued without registration under the Securities Act.
18. LEGEND. Unless theretofore registered for resale under the
------
Securities Act, each certificate for shares issued upon exercise of this Warrant
shall bear the following legend:
The securities represented by this certificate have not been registered under
the Securities Act of 1933, as amended. The securities have been acquired for
investment and may not be resold, transferred or assigned in the absence of an
effective registration statement for the securities under the Securities Act of
1933, as amended, or an opinion of counsel that registration is not required
under said Act.
19. MISCELLANEOUS. This Warrant and any terms hereof may be changed,
-------------
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of such change. waiver, discharge or
termination is sought. This Warrant shall be construed and enforced in
accordance with and governed by the internal laws of the State of Delaware. The
headings in this Warrant are for purposes of reference only, and shall not limit
or otherwise affect any of the terms hereof. The invalidity or unenforceability
of any provision hereof shall in no way affect the validity or enforceability of
any other provision.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed on
its behalf by one of its officers thereunto, duly authorized.
Dated: July __, 1997
AMERICAN BINGO & GAMING CORP.
By:______________________________
Title:___________________________
<PAGE>
LIST OF PERSONS HOLDING WARRANTS GRANTED PURSUANT
TO FORM COMMON STOCK PURCHASE WARRANT
<TABLE>
<CAPTION>
Stockholder Number of Shares
- ----------------------- ----------------
<S> <C>
Plazacorp Investments 5,320
David Heller 34,580
Sam Reisman 16,625
----------------
Total 56,525
================
</TABLE>
<PAGE>
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of July 31, 1997 (this
"Agreement"), is made by and between AMERICAN BINGO & GAMING CORP., a Delaware
corporation (the "Company"), and the person named on the signature page hereto
(the "Initial Investor").
W I T N E S S E T H:
--------------------
WHEREAS, in connection with the Subscription Agreement, dated as of
July 31, 1997, between the Initial Investor and the Company (the "Subscription
Agreement"), the Company has agreed, upon the terms and subject to the
conditions of the Subscription Agreement, to issue and sell to the Initial
Investor an aggregate of _______ shares (the "Initial Preferred Shares") of
preferred stock of the Company as provided in the Subscription Agreement and to
issue additional shares (the "Additional Preferred Shares" and, together with
the Initial Preferred Shares, collectively the "Preferred Shares") which
Preferred Shares are convertible into shares (the "Conversion Shares") of Common
Stock, $.001 par value (the "Common Stock"), of the Company, and to issue a
warrant (the "Warrant") to purchase ____________ shares, subject to adjustment
(the "Warrant Shares"); and
WHEREAS, to induce the Initial Investor to execute and deliver the
Subscription Agreement, the Company has agreed to provide certain registration
rights under the Securities Act of 1933, as amended, and the rules and
regulations thereunder, or any similar successor statute (collectively, the
"Securities Act"), and applicable state securities laws with respect to the
Conversion Shares;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and the
Initial Investor hereby agree as follows:
1. DEFINITIONS.
(a) As used in this Agreement, the following terms shall have the
following meanings:
"Certificate of Designations" means the Certificate of Designations of
Series A Convertible Preferred Stock as filed by the Company with the Secretary
of State of the State of Delaware.
"Computation Date" shall mean
(1) the date which is 91 days after the Closing Date, unless the
Registration Statement theretofore has been declared effective by the SEC,
provided, however, that if the delay in effectiveness was not caused, directly
-------------
or indirectly, by the action or inaction of the Company or its representatives,
the foregoing date shall be extended 15 days and the first Computation Date
shall be the date which is 106 days after the Closing Date,
1
<PAGE>
(2) each date which is 30 days after the Computation Date specified in
the preceding clause (1), if the Registration Statement has not been declared
effective by the SEC prior to such 30th day,
(3) if the Company shall have failed to request acceleration of the
Registration Statement as and when required by Section 3(a) of the Registration
Rights Agreement, the date which is 30 days after the date the Company was so
required to request acceleration (if the Company shall not have so requested
acceleration prior to such 30th day);
(4) each date which is 30 days after the Computation Date referred to
in the preceding clause (4), if the Company shall have failed to so request
acceleration of the Registration Statement prior to such 30th day;
(5) if the Company shall have failed to request acceleration of the
Registration Statement as and when required by Section 3(a) of this Agreement,
the date on which the Company shall have so requested acceleration of the
Registration Statement;
(6) the date on which the Registration Statement has ceased for 30 days
(whether or not consecutive) to be available, for use by any holder of shares of
Series A Convertible Preferred Stock which is named therein as a selling
stockholder with the SEC, if, at any time during which the Registration
Statement is required by this Agreement to remain available for such use, the
Registration Statement ceases to be so available for any reason (including,
without limitation, by reason of an SEC stop order, a material misstatement or
omission therein or the information contained in the Registration Statement
having become outdated) and shall remain so unavailable on such 30th day and
each date which is the 30th day (whether or not consecutive) after such 30th day
on which the Registration Statement shall have remained so unavailable,
(7) the date on which the Registration Statement becomes available for
use by holders of shares of Series A Convertible Preferred Stock, if, at any
time during which the Registration Statement is required by this Agreement to
remain available for such use, the Registration Statement ceases to be so
available for any reason (including, without limitation, by reason of an SEC
stop order, a material misstatement or omission therein or the information
contained in the Registration Statement having become outdated),
(8) the date on which any holder of shares of Series A Convertible
Preferred Stock shall have become unable for 30 days (whether or not
consecutive) to convert shares of Series A Convertible Preferred Stock in
accordance with Section 10(a) of the Certificate of Designations for any reason
(other than by reason of the 4.9% limitation set forth in Section 10(a) of the
Certificate of Designations), if any holder of shares of Series A Convertible
Preferred Stock shall remain unable so to convert shares of Series A Convertible
Preferred Stock on such 30th day and each date which is 30 days after such 30th
day if holders then remain unable to so convert, and
(9) the date on which holders of shares of Series A Convertible
Preferred Stock become able to convert shares of Series A Convertible Preferred
2
<PAGE>
Stock in accordance with Section 10(a) of the Certificate of Designations, if
any holder of shares of Series A Convertible Preferred Stock shall have become
unable to convert shares of Series A Convertible Preferred Stock in accordance
with Section 10(a) of the Certificate of Designations for any reason (other than
by reason of the 4.9% limitation set forth in Section 10(a) of the Certificate
of Designations);
provided, however, that if more than one event which could give rise to a
- ------------------
Computation Date during any period shall have occurred, only one of such events
- ------
shall be deemed to result in a Computation Date so that the adjustments provided
herein by reason of the occurrence of a Computation Date shall be made only once
in respect of any period of time and then in the maximum amount based on all
such Computation Dates.
"Conversion Percentage" has the meaning provided in the Certificate of
Designations.
"Investor" means the Initial Investor and any transferee or assignee who
agrees to become bound by the provisions of this Agreement in accordance with
Section 9 hereof.
"register," "registered," and "registration" refer to a registration
effected by preparing and filing a Registration Statement or Statements in
compliance with the Securities Act and pursuant to Rule 415 under the Securities
Act or an successor rule providing for offering securities on a continuous basis
("Rule 415"), and the declaration or ordering of effectiveness of such
Registration Statement by the United States Securities and Exchange Commission
(the "SEC").
"Registration Event" shall mean (1) the Registration Statement covering the
Registrable Securities which is required to be filed by the Company pursuant to
the first sentence of Section 2(a) hereof is not effective within 90 days after
the Closing Date (unless such date is extended to the 105th day after the
Closing Date as provided in clause (1) of the definition of Compensation Date),
(2) the Company fails to submit a request for acceleration of the effective date
of the Registration Statement in accordance with Section 3(a), (3) the
Registration Statement required to be filed by the Company pursuant to Section
2(a) shall cease to be available for use by any holder of shares of Series A
Convertible Preferred Stock which is named therein as a selling stockholder for
any reason (including, without limitation, by reason of an SEC stop order, a
material misstatement or omission in such Registration Statement or the
information contained in such Registration Statement having become outdated) or
(4) a holder of shares of Series A Convertible Preferred Stock having become
unable to convert any shares of Series A Convertible Preferred Stock in
accordance with Section 10(a) of the Certificate of Designations (other than by
reason of the 4.9% limitation set forth therein).
"Registrable Securities" means the Conversion Shares, the Warrant Shares
and any shares of Common Stock issued by the Company to any Investor as a
dividend on the Preferred Shares.
"Registration Period" means the period from the Closing Date to the earlier
of (i) the date which is two years after the Closing Date and (ii) the date on
which the Investors no longer own any Registrable Securities; provided, however,
-----------------
3
<PAGE>
that if on the date specified in the preceding clause (i) the Investors would
not be permitted under the Securities Act to sell all Registrable Securities
beneficially owned by the Investors without restriction on the manner of sale or
the amount of securities sold and without the requirement for the giving of any
notice to, or the making of any filing with, the SEC, then the period specified
in such clause (i) shall be extended to the earlier of the date on which the
Investors are so permitted or the date which is three years after the Closing
Date.
"Registration Statement" means a registration statement of the Company
under the Securities Act, including any amendment thereto.
"SEC Filing Date" means the date the Registration Statement is first filed
with the SEC pursuant to Section 2(a).
(b) As used in this Agreement, the term Investor includes (i) each
Investor (as defined above) and (ii) each person who is a permitted transferee
or assignee of the Registrable Securities pursuant to Section 9 of this
Agreement.
(c) Capitalized terms defined in the introductory paragraph or the
recitals to this Agreement shall have the respective meanings therein provided.
Capitalized terms used herein and not otherwise defined herein shall have the
respective meanings set forth in the Subscription Agreement.
2. REGISTRATION.
(a) MANDATORY REGISTRATION. (1) The Company shall prepare, and on or
prior to the date which is 30 days after the Closing Date, file with the SEC a
Registration Statement on Form S-3 which on the SEC Filing Date covers the
resale of a number of shares of Common Stock equal to at least the number of
Conversion Shares and the Warrant Shares issuable to the Buyer under the
Preferred Shares, determined as if the Preferred Shares, together with accrued
and unpaid dividends, were converted and the Warrant was exercised in full on
the SEC Filing Date as if such SEC Filing Date were the Closing Date (determined
without regard to the limitation contained in the second sentence of Section
10(a) of the Certificate of Designations) and the resale of such additional
number of shares of Common Stock as the Company shall in its discretion
determine to register in connection with the payment of dividends, as
Registrable Securities, and which Registration Statement shall state that, in
accordance with Rule 416 under the 1933 Act, such Registration Statement also
covers such indeterminate number of additional shares of Common Stock as may
become issuable upon conversion of the Preferred Shares or exercise of the
Warrant to prevent dilution resulting from stock splits, stock dividends or
similar transactions. If, notwithstanding Rule 416 under the 1933 Act, the
Registration Statement is not deemed to cover such indeterminate number of
shares of Common Stock as shall be issuable upon conversion of the Preferred
Shares or exercise of the Warrant based on changes from time to time in the
conversion or exercise price thereof, at any time the number of shares of Common
Stock included in the Registration Statement required to be filed as provided in
the first sentence of this Section 2(a) shall be insufficient to cover the
number of shares of Common Stock issuable on conversion in full of any
unconverted Preferred Shares or exercise of any unexercised portion of the
Warrant, then promptly, but in no event later than 20 days after such
insufficiency shall occur, the Company shall file with the SEC an additional
Registration Statement on Form S-3 (which shall not constitute a post-effective
4
<PAGE>
amendment to the Registration Statement filed pursuant to the first sentence of
this Section 2(a)) covering such number of shares of Common Stock as shall be
sufficient to permit such conversion or exercise. For all purposes of this
Agreement such additional Registration Statement shall be deemed to be the
Registration Statement required to be filed by the Company pursuant to this
Section 2(a), and the Company and the Investors shall have the same rights and
obligations with respect to such additional Registration Statement as they shall
have with respect to the initial Registration Statement required to be filed by
the Company pursuant to this Section 2(a).
(2) Prior to the SEC Effective Date and during any time subsequent to
the SEC Effective Date when the Registration Statement for any reason is not
available for use by any Investor for the resale of any Shares, the Company
shall not file any other registration statement or any amendment thereto with
the SEC under the 1933 Act or request the acceleration of the effectiveness of
any other registration statement previously filed with the SEC other than (A)
any registration statement on Form S-8 and (B) any registration statement or
amendment which the Company is required to file or as to which the Company is
required to request acceleration pursuant to any obligation in effect on the
Closing Date. The Company's obligation to register the Registrable Securities
under this Section 2 shall constitute a registration pursuant to a demand
registration right held by the Investors.
(b) CERTAIN OFFERINGS. If any offering pursuant to a Registration
Statement pursuant to Section 2(a) hereof involves an underwritten offering, the
Investors shall have the right to select an investment banker or bankers and
manager or managers to administer the offering and one legal counsel for the
Investors, which investment banker or bankers or manager or managers and legal
counsel shall be reasonably satisfactory to the Investors who hold a majority in
interest of the Registrable Securities subject to such underwritten offering and
to the Company. The Investors who hold the Registrable Securities to be
included in such underwriting shall pay all underwriting discounts and
commissions and other fees and expenses of such investment banker or bankers and
manager or managers so selected in accordance with this Section 2(b) (other than
fees and expenses relating to registration of Registrable Securities under
federal or state securities laws, which are payable by the Company pursuant to
Section 5 hereof) with respect to their Registrable Securities and the fees and
expenses of such legal counsel so selected by the Investors.
(c) ISSUANCE OF ADDITIONAL PREFERRED SHARES. If a Registration Event
shall occur, then for each period of 30 days (or any portion thereof) that any
Registration Event shall continue, the Company shall issue and deliver, or cause
to be issued and delivered, within two business days after each Computation
Date, to the Initial Investor 32 (pro rated in the case of any Computation Date
that is less than 30 days after another Computation Date) additional shares of
Series A Preferred Stock.
(d) PIGGY-BACK REGISTRATIONS. If at any time the Company shall
determine to prepare and file with the SEC a Registration Statement relating to
an offering for its own account or the account of others under the Securities
Act of any of its equity securities, other than on Form S-4 or Form S-8 or their
then equivalents relating to equity securities to be issued solely in connection
with any acquisition of any entity or business or equity securities issuable in
connection with stock option or other employee benefit plans, the Company shall
5
<PAGE>
send to each Investor who is entitled to registration rights under this Section
2(d) written notice of such determination and, if within ten (10) days after
receipt of such notice, such Investor shall so request in writing, the Company
shall include in such Registration Statement all or any part of the Registrable
Securities such Investor requests to be registered, except that if, in
connection with any underwritten public offering for the account of the Company
the managing underwriter(s) thereof shall impose a limitation on the number of
shares of Common Stock which may be included in the Registration Statement
because, in such underwriter(s)'judgment, such limitation is necessary to effect
an orderly public distribution, then the Company shall be obligated to include
in such Registration Statement only such limited portion of the Registrable
Securities with respect to which such Investor has requested inclusion
hereunder. Any exclusion of Registrable Securities shall be made pro rata among
the Investors seeking to include Registrable Securities, in proportion to the
number of Registrable Securities sought to be included by such Investors;
provided, however, that the Company shall not exclude any Registrable Securities
-- -------
unless the Company has first excluded all outstanding securities the holders of
which are not entitled by right to inclusion of securities in such Registration
Statement; and provided further, however, that, after giving effect to the
---------------------------
immediately preceding proviso, any exclusion of Registrable Securities shall be
made pro rata with holders of other securities having the right to include such
securities in the Registration Statement, based on the number of securities for
which registration is requested except to the extent such pro rata exclusion of
such other securities is prohibited under any written agreement entered into by
the Company with the holder of such other securities prior to the date of this
Agreement, in which case such other securities shall be excluded, if at all, in
accordance with the terms of such agreement. No right to registration of
Registrable Securities under this Section 2(d) shall be construed to limit any
registration required under Section 2(a) hereof. The obligations of the Company
under this Section 2(d) may be waived by Investors holding a majority in
interest of the Registrable Securities and shall expire after the Company has
afforded the opportunity for the Investors to exercise registration rights under
this Section 2(d) for two registrations; provided, however, that any Investor
-------- -------
who shall have had any Registrable Securities excluded from any Registration
Statement in accordance with this Section 2(d) shall be entitled to include in
an additional Registration Statement filed by the Company the Registrable
Securities so excluded. Notwithstanding any other provision of this Agreement,
if the Registration Statement required to be filed pursuant to Section 2(a) of
this Agreement shall have been ordered effective by the SEC and the Company
shall have maintained the effectiveness of such Registration Statement as
required by this Agreement and if the Company shall otherwise have complied in
all material respects with its obligations under this Agreement, then the
Company shall not be obligated to register any Registrable Securities on such
Registration Statement referred to in this Section 2(d).
(e) ELIGIBILITY FOR FORM S-3. The Company meets the requirements for
the use of Form S-3 for registration of the Registrable Securities for resale by
the Investors. The Company shall file all reports required to be filed by the
Company with the SEC in a timely manner so as to become eligible for the use of
Form S-3 and so as to maintain such eligibility for the use of Form S-3.
3. OBLIGATIONS OF THE COMPANY. In connection with the registration of
the Registrable Securities, the Company shall:
6
<PAGE>
(a) prepare promptly, and file with the SEC not later than 30 days
after the Closing Date, a Registration Statement with respect to the number of
Registrable Securities provided in Section 2(a), and thereafter to use its best
efforts to cause each Registration Statement relating to Registrable Securities
to become effective as soon as possible after such filing, and keep the
Registration Statement effective pursuant to Rule 415 at all times during the
Registration Period; submit to the SEC, within three business days after the
Company learns that no review of the Registration Statement will be made by the
staff of the SEC or that the staff of the SEC has no further comments on the
Registration Statement, as the case may be, a request for acceleration of
effectiveness of the Registration Statement to a time and date not later than 48
hours after the submission of such request; and the Company represents and
warrants to, and covenants and agrees with, the Investors that the Registration
Statement (including any amendments or supplements thereto and prospectuses
contained therein), at the time it is first filed with the SEC, at the time it
is ordered effective by the SEC and at all time during which it is required to
be effective hereunder (and each such amendment and supplement at the time it is
filed with the SEC and at all time during which it is available for use in
connection with the offer and sale of the Registrable Securities) shall not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein, or necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading;
(b) prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to the Registration Statement and the
prospectus used in connection with the Registration Statement as may be
necessary to keep the Registration Statement effective at all times during the
Registration Period, and, during the Registration Period, comply with the
provisions of the Securities Act with respect to the disposition of all
Registrable Securities of the Company covered by the Registration Statement
until such time as all of such Registrable Securities have been disposed of in
accordance with the intended methods of disposition by the seller or sellers
thereof as set forth in the Registration Statement;
(c) furnish to each Investor whose Registrable Securities are included
in the Registration Statement and its legal counsel, (1) promptly after the same
is prepared and publicly distributed, filed with the SEC or received by the
Company, one copy of the Registration Statement and any amendment thereto, each
preliminary prospectus and prospectus and each amendment or supplement thereto,
each letter written by or on behalf of the. Company to the SEC or the staff of
the SEC and each item of correspondence from the SEC or the staff of the SEC
relating to such Registration Statement (other than any portion of any thereof
which contains information for which the Company has sought confidential
treatment) and (2) such number of copies of a prospectus, including a
preliminary prospectus, and all amendments and supplements thereto and such
other documents, as such Investor may reasonably request in order to facilitate
the disposition of the Registrable Securities owned by such Investor;
(d) use reasonable efforts to (i) register and qualify the Registrable
Securities covered by the Registration Statement under such securities or blue
sky laws of such jurisdictions as the Investors who hold a majority in interest
of the Registrable Securities being offered reasonably request, (ii) prepare and
file in those jurisdictions such amendments (including posteffective amendments)
7
<PAGE>
and supplements to such registrations and qualifications as may be necessary to
maintain the effectiveness thereof at all times until the end of the
Registration Period, (iii) take such other actions as may be necessary to
maintain such registrations and qualifications in effect at all times during the
Registration Period and (iv) take all other actions reasonably necessary or
advisable to qualify the Registrable Securities for sale in such jurisdictions;
provided, however, that the Company shall not be required in connection
- ------------------
therewith or as a condition thereto (I) to qualify to do business in any
jurisdiction where it would not otherwise be required to qualify but for this
Section 3(d), (II) to subject itself to general taxation in any such
jurisdiction, (III) to file a general consent to service of process in any such
jurisdiction, (IV) to provide any undertakings that cause more than nominal
expense or burden to the Company or (V) to make any change in its charter or
by-laws, which in each case the Board of Directors of the Company determines to
be contrary to the best interests of the Company and its stockholders; and
provided further, however, that the cost of obtaining blue sky clearance in
--- ------- -------
states in addition to the Company's current blue sky clearances as listed on
Schedule 3(g) to the Subscription Agreement shall be borne by the Investors;
-----------
(e) in the event that the Registrable Securities are being offered in
an underwritten offering, enter into and perform its obligations under an
underwriting agreement, in usual and customary form, including, without
limitation, customary indemnification and contribution obligations, with the
underwriters of such offering;
(f) as promptly as practicable after becoming aware of such event or
circumstance, notify each Investor of any event or circumstance of which the
Company has knowledge, as a result of which the prospectus included in the
Registration Statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, and use its best efforts promptly to
prepare a supplement or amendment to the Registration Statement to correct such
untrue statement or omission, and deliver a number of copies of such supplement
or amendment to each Investor as such Investor may reasonably request;
(g) as promptly as practicable after becoming aware of such event,
notify each Investor who holds Registrable Securities being sold (or, in the
event of an underwritten offering, the managing underwriters) of the issuance by
the SEC of any stop order or other suspension of effectiveness of the
Registration Statement at the earliest possible time;
(h) permit a single firm of counsel designated as selling stockholders'
counsel by the Investors who hold a majority in interest of the Registrable
Securities being sold to review and comment on the Registration Statement and
all amendments and supplements thereto a reasonable period of time prior to
their filing with the SEC;
(i) make generally available to its security holders as soon as
practical, but not later than ninety (90) days after the close of the period
covered thereby, an earnings statement (in form complying with the provisions of
Rule 158 under the Securities Act) covering a twelve-month period beginning not
later than the first day of the Company's fiscal quarter next following the
effective date of the Registration Statement;
(j) at the request of the Investors who hold a majority in interest of
the Registrable Securities being sold, furnish on the date that Registrable
Securities are delivered to an underwriter, if any, for sale in connection with
the Registration Statement (i) a letter, dated such date, from the Company's
8
<PAGE>
independent certified public accountants in form and substance as is customarily
given by independent certified public accountants to underwriters in an
underwritten public offering, addressed to the underwriters; and (ii) an
opinion, dated such date, from counsel representing the Company for purposes of
such Registration Statement, in form and substance as is customarily given in an
underwritten public offering, addressed to the underwriters and the Investors;
(k) make available for inspection by any Investor, any underwriter
participating in any disposition pursuant to the Registration Statement, and any
attorney, accountant or other agent retained by any such Investor or underwriter
(collectively, the "Inspectors"), all pertinent financial and other records,
pertinent corporate documents and properties of the Company (collectively, the
"Records"), as shall be reasonably necessary to enable each Inspector to
exercise its due diligence responsibility, and cause the Company's officers,
directors and employees to supply all information which any Inspector may
reasonably request for purposes of such due diligence; provided, however, that
-----------------
each Inspector shall hold in confidence and shall not make any disclosure
(except to an Investor) of any Record or other information which the Company
determines in good faith to be confidential, and of which determination the
Inspectors are so notified, unless (i) the disclosure of such Records is
necessary to avoid or correct a misstatement or omission in any Registration
Statement, (ii) the release of such Records is ordered pursuant to a subpoena or
other order from a court or government body of competent jurisdiction or (iii)
the information in such Records has been made generally available to the public
other than by disclosure in violation of this or any other agreement. The
Company shall not be required to disclose any confidential information in such
Records to any Inspector until and unless such Inspector shall have entered into
confidentiality agreements (in form and substance satisfactory to the Company)
with the Company with respect thereto, substantially in the form of this Section
3(k). Each Investor agrees that it shall, upon learning that disclosure of such
Records is sought in or by a court or governmental body of competent
jurisdiction or through other means, give prompt notice to the Company and allow
the Company, at the Company's own expense, to undertake appropriate action to
prevent disclosure of, or to obtain a protective order for, the Records deemed
confidential. The Company shall hold in confidence and shall not make any
disclosure of information concerning an Investor provided to the Company
pursuant to Section 4(e) hereof unless (i) disclosure of such information is
necessary to comply with federal or state securities laws, (ii) the disclosure
of such information is necessary to avoid or correct a misstatement or omission
in any Registration Statement, (iii) the release of such information is ordered
pursuant to a subpoena or other order from a court or governmental body of
competent jurisdiction or (iv) such information has been made generally
available to the public other than by disclosure in violation of this or any
other agreement. The Company agrees that it shall, upon learning that
disclosure of such information concerning an Investor is sought in or by a court
or governmental body of competent jurisdiction or through other means, give
prompt notice to such Investor, at such Investor's own expense, to undertake
appropriate action to prevent disclosure of, or to obtain a protective order
for, such information;
(l) use its best efforts (i) to cause all the Registrable Securities
covered by the Registration Statement to be listed on the Nasdaq SmallCap Market
("Nasdaq") or such other principal securities market on which securities of the
same class or series issued by the Company are then listed or traded or (ii) if
securities of the same class or series as the Registrable Securities are not
9
<PAGE>
then listed on Nasdaq or any such other securities market, to cause all of the
Registrable Securities covered by the Registration Statement to be listed on the
New York Stock Exchange or the American Stock Exchange;
(m) provide a transfer agent and registrar, which may be a single
entity, for the Registrable Securities not later than the effective date of the
Registration Statement;
(n) cooperate with the Investors who hold Registrable Securities being
offered and the managing underwriter or underwriters, if any, to facilitate the
timely preparation and delivery of certificates (not bearing any restrictive
legends) representing Registrable Securities to be offered pursuant to the
Registration Statement and enable such certificates to be in such denominations
or amounts as the case may be, as the managing underwriter or underwriters, if
any, or the Investors may reasonably request and registered in such names as the
managing underwriter or underwriters, if any, or the Investors may request; and,
within three business days after a Registration Statement which includes
Registrable Securities is ordered effective by the SEC, the Company shall
deliver, and shall cause legal counsel selected by the Company to deliver, to
the transfer agent for the Registrable Securities (with copies to the Investors
whose Registrable Securities are included in such Registration Statement) an
instruction substantially in the form attached hereto as Exhibit 1 and an
opinion of such counsel, if required by the Company's transfer agent, in the
form attached hereto as Exhibit 2;
(o) during the period the Company is required to maintain effectiveness
of the Registration Statement pursuant to Section 3(a), the Company shall not
bid for or purchase any Common Stock or any right to purchase Common Stock or
attempt to induce any person to purchase any such security or right if such bid,
purchase or attempt would in any way limit the right of the Investors to sell
Registrable Securities by reason of the limitations in Regulation M under the
Exchange Act; and
(p) take all other reasonable actions necessary to expedite and
facilitate disposition by the Investor of the Registrable Securities pursuant to
the Registration Statement.
4. OBLIGATIONS OF THE INVESTORS. In connection with the registration
of the Registrable Securities, the Investors shall have the following
obligations:
(a) It shall be a condition precedent to the obligations of the Company
to complete the registration pursuant to this Agreement with respect to the
Registrable Securities of a particular Investor that such Investor shall furnish
to the Company such information regarding itself, the Registrable Securities
held by it and the intended method of disposition of the Registrable Securities
held by it as shall be reasonably required to effect the registration of such
Registrable Securities and shall execute such documents in connection with such
registration as the Company may reasonably request. At least four (4) days
prior to the first anticipated filing date of the Registration Statement, the
Company shall notify each Investor of the information the Company requires from
each such Investor (the "Requested Information") if any of such Investor's
Registrable Securities are eligible for inclusion in the Registration Statement.
If at least one (1) business day prior to the filing date the Company has not
received the Requested Information from an Investor (a "Non-Responsive
Investor"), then the Company may file the Registration Statement without
including Registrable Securities of such Non-Responsive Investor;
10
<PAGE>
(b) Each Investor by such Investor's acceptance of the Registrable
Securities agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of the Registration
Statement hereunder, unless such Investor has notified the Company in writing of
such Investor's election to exclude all of such Investor's Registrable
Securities from the Registration Statement;
(c) In the event Investors holding a majority in interest of the
Registrable Securities being registered determine to engage the services of an
underwriter, each Investor agrees to enter into and perform such Investor's
obligations under an underwriting agreement, in usual and customary form,
including, without limitation, customary indemnification and contribution
obligations, with the managing underwriter of such offering and take such other
actions as are reasonably required in order to expedite or facilitate the
disposition of the Registrable Securities, unless such Investor has notified the
Company in writing of such Investor's election to exclude all of such Investor's
Registrable Securities from the Registration Statement;
(d) Each Investor agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section 3(f) or
3(g), such Investor will immediately discontinue disposition of Registrable
Securities pursuant to the Registration Statement covering such Registrable
Securities until such Investor's receipt of the copies of the supplemented or
amended prospectus contemplated by Section 3(f) or 3(g) and, if so directed by
the Company, such Investor shall deliver to the Company (at the expense of the
Company) or destroy (and deliver to the Company a certificate of destruction)
all copies in such Investor's possession, of the prospectus covering such
Registrable Securities current at the time of receipt of such notice; and
(e) No Investor may participate in any underwritten registration
hereunder unless such Investor (i) agrees to sell such Investor's Registrable
Securities on the basis provided in any underwriting arrangements approved by
the Investors entitled hereunder to approve such arrangements, (ii) completes
and executes all questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents reasonably required under the terms of such
underwriting arrangements and (iii) agrees to pay its pro rata share of all
underwriting discounts and commissions and other fees and expenses of investment
bankers and any manager or managers of such underwriting and legal expenses of
the underwriters applicable with respect to its Registrable Securities, in each
case to the extent not payable by the Company pursuant to the terms of this
Agreement.
5. EXPENSES OF REGISTRATION. All reasonable expenses, other than
underwriting discounts and commissions and other fees and expenses of investment
bankers and other than brokerage commissions, incurred in connection with
registrations, filings or qualifications pursuant to Section 3, including,
without limitation, all registration, listing and qualifications fees, printers
and accounting fees and the fees and disbursements of counsel for the Company
and the Investors, shall be borne by the Company, provided, however, that the
-------- --------
Investors shall bear the fees and out-of-pocket expenses of the one legal
counsel selected by the Investors pursuant to Section 2(b) hereof.
11
<PAGE>
6. INDEMNIFICATION. In the event any Registrable Securities are
included in a Registration Statement under this Agreement:
(a) To the extent permitted by law, the Company will indemnify and hold
harmless each Investor who holds such Registrable Securities, the directors, if
any, of such Investor, the officers, if any, of such Investor, each person, if
any, who controls any Investor within the meaning of the Securities Act or the
Exchange Act, any underwriter (as defined in the Securities Act) for the
Investors, the directors, if any, of such underwriter and the officers, if any,
of such underwriter, and each person, if any, who controls any such underwriter
within the meaning of the Securities Act or the Exchange Act (each, an
"Indemnified Person"), against any losses, claims, damages, liabilities or
expenses (joint or several) incurred (collectively, "Claims") to which any of
them may become subject under the Securities Act, the Exchange Act or otherwise,
insofar as such Claims (or actions or proceedings, whether commenced or
threatened, in respect thereof) arise out of or are based upon any of the
following statements, omissions or violations in the Registration Statement, or
any post-effective amendment thereof, or any prospectus included therein: (i)
any untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement or any post-effective amendment thereof or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, (ii)
any untrue statement or alleged untrue statement of a material fact contained in
any preliminary prospectus if used prior to the effective date of such
Registration Statement, or contained in the final prospectus (as amended or
supplemented, if the Company files any amendment thereof or supplement thereto
with the SEC) or the omission or alleged omission to state therein any material
fact necessary to make the statements made therein, in light of the
circumstances under which the statements therein were made, not misleading or
(iii) any violation or alleged violation by the Company of the Securities Act,
the Exchange Act, any state securities law or any rule or regulation under the
Securities Act, the Exchange Act or any state securities law (the matters in the
foregoing clauses (i) through (iii) being, collectively, "Violations"). Subject
to the restrictions set forth in Section 6(d) with respect to the number of
legal counsel, the Company shall reimburse the Investors and each such
underwriter or controlling person, promptly as such expenses are incurred and
are due and payable, for any legal fees or other reasonable expenses incurred by
them in connection with investigating or defending any such Claim.
Notwithstanding anything to the contrary contained herein, the indemnification
agreement contained in this Section 6(a): (I) shall not apply to a Claim arising
out of or based upon a Violation which occurs in reliance upon and in conformity
with information furnished in writing to the Company by any Indemnified Person
or underwriter for such Indemnified Person expressly for use in connection with
the preparation of the Registration Statement or any such amendment thereof or
supplement was timely made available by the Company pursuant to Section 3(c)
thereto, if such prospectus hereof; (II) with respect to any preliminary
prospectus shall not inure to the benefit of any such person from whom the
person asserting any such Claim purchased the Registrable Securities that are
the subject thereof (or to the benefit of any person controlling such person) if
the untrue statement or omission of material fact contained in the preliminary
prospectus was corrected in the prospectus, as then amended or supplemented, if
such prospectus was timely made available by the Company pursuant to Section
3(c) hereof; and (III) shall not apply to amounts paid in settlement of any
Claim if such settlement is effected without the prior written consent of the
Company, which consent shall not be unreasonably withheld. Such indemnity shall
remain in full force and effect regardless of any investigation made by or on
behalf of the Indemnified Person and shall survive the transfer of the
Registrable Securities by the Investors pursuant to Section 9.
12
<PAGE>
(b) In connection with any Registration Statement in which an Investor
is participating, each such Investor agrees to indemnify and hold harmless, to
the same extent and in the same manner set forth in Section 6(a), the Company,
each of its directors, each of its officers who signs the Registration
Statement, each person, if any, who controls the Company within the meaning of
the Securities Act or the Exchange Act, any underwriter and any other
stockholder selling securities pursuant to the Registration Statement or any of
its directors or officers or any person who controls such stockholder or
underwriter within the meaning of the Securities Act or the Exchange Act
(collectively and together with an Indemnified Person, an "Indemnified Party"),
against any Claim to which any of them may become subject, under the Securities
Act, the Exchange Act or otherwise, insofar as such Claim arises out of or is
based upon any Violation, in each case to the extent (and only to the extent)
that such Violation occurs in reliance upon and in conformity with written
information furnished to the Company by such Investor expressly for use in
connection with such Registration Statement; and such Investor will reimburse
any legal or other expenses reasonably incurred by any Indemnified Party in
connection with investigating or defending any such Claim; provided, however,
-------- --------
that the indemnity agreement contained in this Section 6(b) shall not apply to
amounts paid in settlement of any Claim if such settlement is effected without
the prior written consent of such Investor, which consent shall not be
unreasonably withheld; provided, further, however, that the Investor shall be
-------- ------- -------
liable under this Section 6(b) for only that amount of a Claim as does not
exceed the amount by which the net proceeds to such Investor from the sale of
Registrable Securities pursuant to such Registration Statement exceeds the cost
of such Registrable Securities to such Investor. Such indemnity shall remain in
full force and effect regardless of any investigation made by or on behalf of
such Indemnified Party and shall survive the transfer of the Registrable
Securities by the Investors pursuant to Section 9. Notwithstanding, anything to
the contrary contained herein, the indemnification agreement contained in this
Section 6(b) with respect to any preliminary prospectus shall not inure to the
benefit of any Indemnified Party if the untrue statement or omission of material
fact contained in the preliminary prospectus was corrected on a timely basis in
the prospectus, as then amended or supplemented.
(c) The Company shall be entitled to receive indemnities from
underwriters, selling brokers, dealer managers and similar securities industry
professionals participating in any distribution, to the same extent as provided
above, with respect to information so furnished in writing by such persons
expressly for inclusion in the Registration Statement.
(d) Promptly after receipt by an Indemnified Person or Indemnified
Party under this Section 6 of notice of the commencement of any action
(including any governmental action), such Indemnified Person or Indemnified
Party shall, if a Claim in respect thereof is to be made against any
indemnifying party under this Section 6, deliver to the indemnifying party a
written notice of the commencement thereof and the indemnifying party shall have
the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed, to assume
control of the defense thereof with counsel selected by the indemnifying party
but reasonably acceptable to the Indemnified Person or the Indemnified Party, as
the case may be; provided, however, that an Indemnified Person or Indemnified
-------- -------
Party shall have the right to retain its own counsel with the fees and expenses
13
<PAGE>
to be paid by the indemnifying party, if, in the reasonable opinion of counsel
retained by the indemnifying party, the representation by such counsel of the
Indemnified Person or Indemnified Party and the indemnifying party would be
inappropriate due to actual or potential differing interests between such
Indemnified Person or Indemnified Party and any other party represented by such
counsel in such proceeding. In such event, the Company shall pay for only one
separate legal counsel for the Investors; such legal counsel shall be selected
by the Investors holding, a majority in interest of the Registrable Securities
included in the Registration Statement to which the Claim relates. The failure
to deliver written notice to the indemnifying party within a reasonable time of
the commencement of any such action shall not relieve such indemnifying party of
any liability to the Indemnified Person or Indemnified Party under this Section
6, except to the extent that the indemnifying party is prejudiced in its ability
to defend such action. The indemnification required by this Section 6 shall be
made by periodic payments of the amount thereof during the course of the
investigation or defense, as such expense, loss, damage or liability is incurred
and is due and payable.
7. CONTRIBUTION. To the extent any indemnification by an indemnifying
party is prohibited or limited by law, the indemnifying party agrees to make the
maximum contribution with respect to any amounts for which it would otherwise be
liable under Section 6 to the fullest extent permitted by law; provided,
--------
however, that (a) no contribution shall be made under circumstances where the
maker would not have been liable for indemnification under the fault standards
set forth in Section 6, (b) no seller of Registrable Securities guilty of
fraudulent misrepresentation (within the meaning of Section 11 (f) of the
Securities Act) shall be entitled to contribution from any seller of Registrable
Securities who was not guilty of such fraudulent misrepresentation and (c)
contribution by any seller of Registrable Securities shall be limited in amount
to the amount by which the net amount of proceeds received by such seller from
the sale of such Registrable Securities exceeds the purchase price paid by such
seller for such Registrable Securities.
8. REPORTS UNDER EXCHANGE ACT. With a view to making available to the
Investors the benefits of Rule 144 promulgated under the Securities Act or any
other similar rule or regulation of the SEC that may at any time permit the
Investors to sell securities of the Company to the public without Registration
("Rule 144"), the Company agrees to use its best efforts to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144;
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act,
and
(c) furnish to each Investor so long as such Investor owns Registrable
Securities, promptly upon request, (i) a written statement by the Company that
it has complied with the reporting requirements of Rule 144, the Securities Act
and the Exchange Act, (ii) a copy of the most recent annual or quarterly report
of the Company and such other reports and documents so filed by the Company and
(iii) such other information as may be reasonably requested to permit the
Investors to sell such securities pursuant to Rule 144 without registration.
14
<PAGE>
9. ASSIGNMENT OF THE REGISTRATION RIGHTS. The rights and obligations
of any Investor pursuant to this Agreement shall be automatically assigned by
the Investors to any transferee of all or any portion of the Registrable
Securities (or all or any portion of the Preferred Shares or the Warrant) only
if: (a) the Investor agrees in writing with the transferee or assignee to assign
such rights, and a copy of such agreement is furnished to the Company within a
reasonable time after such assignment, (b) the Company is, within a reasonable
time after such transfer or assignment, furnished with written notice of (i) the
name and address of such transferee or assignee and (ii) the securities with
respect to which such registration rights are being transferred or assigned, (c)
immediately following such transfer or assignment the further disposition of
such securities by the transferee or assignee is restricted under the Securities
Act and applicable state securities laws, and (d) at or before the time the
Company received the written notice contemplated by clause (b) of this sentence
the transferee or assignee agrees in writing with the Company to be bound by all
of the provisions contained herein. In connection with any such transfer the
Company shall, at the sole cost and expense of the transferee, promptly after
such assignment take such actions as shall be reasonably acceptable to the
Initial Investor and such transferee to assure that the Registration Statement
and related prospectus are available for use by such transferee for sales of the
Registrable Securities in respect of which the rights to registration have been
so assigned.
10. AMENDMENT OF REGISTRATION RIGHTS. Any provision of this Agreement
may be amended and the observance thereof may be waived (either generally or in
a particular instance and either retroactively or prospectively), only with the
written consent of the Company and Investors who hold a majority in interest of
the Registrable Securities. Any amendment or waiver effected in accordance with
this Section 10 shall be binding upon each Investor and the Company.
11. MISCELLANEOUS.
(a) A person or entity is deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.
(b) Notices required or permitted to be given hereunder shall be in
writing and shall be deemed to be sufficiently given when personally delivered
(by hand, by courier, by telephone line facsimile transmission or other means)
or sent by United States or Canadian certified mail, return receipt requested,
properly addressed and with proper postage pre-paid (i) if to the Company,
addressed to the Company at 515 Congress Avenue, Suite 7200, Austin, Texas
75701, Attention: Chief Financial Officer, telephone line facsimile transmission
No. (512) 472-4307, (ii) if to the Initial Investor, to Plazacorp Investments
Limited, 3845 Bathurst Street, Suite 202, North York, Ontario, M3H 3N2, Canada,
telephone line facsimile transmission No. (416) 630-4626 and (iii) if to any
other Investor, at such address as such Investor shall have provided in writing
to the Company, or at such other address as each such party furnishes by notice
given in accordance with this Section 1l(b), and shall be effective, when
personally delivered, upon receipt and, when so sent by certified mail, four
days after deposit with the United States or Canadian Postal Service.
15
<PAGE>
(c) Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
(d) This Agreement shall be enforced, governed by and construed in
accordance with the laws of the State of New York applicable to agreements made
and to be performed entirely within such State. In the event that any provision
of this Agreement is invalid or unenforceable under any applicable statute or
rule of law, then such provision shall be deemed inoperative to the extent that
it may conflict therewith and shall be deemed modified to conform with such
statute or rule of law. Any provision hereof which may prove invalid or
unenforceable under any law shall not affect the validity or enforceability of
any other provision hereof.
(e) This Agreement constitutes the entire agreement among the parties
hereto with respect to the subject matter hereof. There are no restrictions,
promises, warranties or undertakings, other than those set forth or referred to
herein. This Agreement supersedes all prior agreements and understandings among
the parties hereto with respect to the subject matter hereof.
(f) Subject to the requirements of Section 9 hereof, this Agreement
shall inure to the benefit of and be binding upon the successors and assigns of
each of the parties hereto.
(g) All pronouns and any variations thereof refer to the masculine,
feminine or neuter, singular or plural, as the context may require.
(h) The headings in this Agreement are for convenience of reference
only and shall not limit or otherwise affect the meaning hereof.
(i) The Company acknowledges that any failure by the Company to perform
its obligations under this Agreement, including, without limitation, the
Company's obligations under Section 3(n), or any delay in such performance could
result in damages to the Investors and the Company agrees that, in addition to
any other liability the Company may have by reason of any such failure or delay,
the Company shall be liable for all direct and consequential damages caused by
any such failure or delay.
(j) This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original but all of which shall constitute one and the
same agreement. This Agreement, once executed by a party, may be delivered to
the other party hereto by telephone line facsimile transmission of a copy of
this Agreement bearing the signature of the party so delivering this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed by their respective officers thereunto duly authorized as of day and
year first above written.
AMERICAN BINGO & GAMING CORP.
By_______________________________
Name:
Title:
16
<PAGE>
INITIAL INVESTOR
By_______________________________
Name:
Title:
17
<PAGE>
<TABLE>
<CAPTION>
LIST OF INVESTORS UNDER SERIES A CONVERTIBLE
PREFERRED STOCK FINANCING
Number of Number of Warrants
Stockholder Preferred Shares For Common Shares
- ----------------------- ---------------- ------------------
<S> <C> <C>
Plazacorp Investments 80 5,320
P.R.I.F. #4 1,150 76,475
David Heller 520 34,580
Sam Reisman 250 16,625
---------------- ------------------
Total 2,000 133,000
================ ==================
</TABLE>
18
<PAGE>
EXHIBIT 11.1
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------
1998 1997
-------------------------- -----------------------
Basic Diluted Basic Diluted
<S> <C> <C> <C> <C>
Numerator:
- --------------------------------------
Net income (loss) $(2,600,222) $(2,600,222) $1,284,856 $1,284,856
less preferred dividends (97,857) (97,857) (58,333) ---
------------ ------------ ----------- ----------
Income (loss)
Available to common stockholders $(2,698,079) $(2,698,079) $1,226,523 $1,284,856
============ ============ =========== ==========
Denominator:
- --------------------------------------
Weighted average shares outstanding 9,299,908 9,299,908 7,160,612 7,160,612
------------ ------------ ----------- ----------
Effect of dilutive securities:
Preferred stock --- --- --- 220,620
Stock options and warrants --- --- --- 752,554
------------ ------------ ----------- ----------
Weighted average shares outstanding 9,299,908 9,299,908 7,160,612 8,133,786
============ ============ =========== ==========
Earnings (loss) per share $ (.29) $ (.29) $ .17 $ .16
============ ============ =========== ==========
</TABLE>
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
Provided below is a list of the subsidiaries of the Company, all of which
are wholly owned, grouped by their respective state of incorporation. Any name
under which a Subsidiary is doing business is provided in parentheses.
ALABAMA CORPORATIONS
- ---------------------
1. Bing-O-Rama, Inc. (Bingo Haven)
2. Charity Bingo, Inc. (Winner's Bingo; Chickasaw Bingo)
3. Charity Bingo-Birmingham, Inc.
FLORIDA CORPORATIONS
- ---------------------
1. Delray Hall For Hire, Inc.
GEORGIA CORPORATIONS
- ---------------------
1. Lucky 4, Inc.
MISSISSIPPI CORPORATIONS
- -------------------------
1. Delta Bingo, Inc.
2. Forest Bingo, Inc.
3. Grenada Bingo, Inc.
4. Louisville Bingo, Inc.
5. Starkville Bingo, Inc.
SOUTH CAROLINA CORPORATIONS
- -----------------------------
1. Columbia One Corp. (American Bingo I; American Bingo II)
2. Concessions Corp. (Shipwatch; Ponderosa; Beacon; Lucky I; Lucky II)
3. Dabber's Bingo, Inc.
4. Darlington Music Co., Inc.
5. Gamecock Promotions, Inc.
6. Gold Strike, Inc.
7. Low Country Promotions, Inc.
8. MHJ Corporation
9. Midlands Promotions, Inc.
10. S.C. Properties II, Inc.
<PAGE>
TEXAS CORPORATIONS
- -------------------
1. 1919 Riverside Corp.
2. Ambler Bingo, Inc. (Ambler Bingo)
3. Americana I, Inc. (Americana Bingo)
4. Americana II, Inc.
5. Americana III, Inc.
6. Americana IV, Inc.
7. Charity Bingo of Texas, Inc.
8. Lavaca Enterprises, Incorporated (Hi Plains Bingo)
9. Lucky Bingo, Inc. (Lucky Bingo)
10. Meeks Management Company (Goldstar Bingo)
11. Parkway Bingo, Inc. (Parkway Bingo)
12. S.A. Charities, Inc. (Blanco Bingo)
13. Strike It Rich Bingo, Inc. (Strike It Rich Bingo)
14. Texas Charities, Inc. (Fortune Bingo)
15. The Samaritan Associates, Inc. (Goldstar II Bingo)
16. West Texas Bingo, Inc. (Super Bingo)
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Form
10-KSB of American Bingo & Gaming Corp. and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,953,401
<SECURITIES> 0
<RECEIVABLES> 2,025,477
<ALLOWANCES> (305,190)
<INVENTORY> 0
<CURRENT-ASSETS> 6,398,790
<PP&E> 11,307,149
<DEPRECIATION> (5,049,300)
<TOTAL-ASSETS> 18,982,572
<CURRENT-LIABILITIES> 1,797,340
<BONDS> 0
<COMMON> 9,850
0
0
<OTHER-SE> 16,085,184
<TOTAL-LIABILITY-AND-EQUITY> 18,982,572
<SALES> 15,445,456
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 17,796,998
<OTHER-EXPENSES> 190,730
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 313,206
<INCOME-PRETAX> (2,337,078)
<INCOME-TAX> 263,144
<INCOME-CONTINUING> (2,600,222)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,600,222)
<EPS-PRIMARY> (.29)
<EPS-DILUTED> (.29)
</TABLE>
