Item 1.01 Entry into a Material Definitive Agreemen
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As previously reported in a Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on April 14, 2016, AG&E Holdings Inc., an Illinois corporation (the “Company”), entered into an Agreement and Plan of Merger (as amended to date, the “Merger Agreement”) with American Gaming & Electronics, Inc., a Nevada corporation and wholly-owned subsidiary of the Company (“Merger Sub”), Advanced Gaming Associates LLC, a Pennsylvania limited liability company (“AGA”), and Anthony Tomasello, as the sole member and representative of AGA (“Mr. Tomasello”).
The consummation of the transactions contemplated by the Merger Agreement (the “Closing”) occurred on November 30, 2016 (the “Closing Date”). On the Closing Date, AGA was merged with and into Merger Sub (the “Merger”), and the separate legal existence of AGA ceased, with Merger Sub continuing as the surviving entity of the Merger and remaining a wholly-owned subsidiary of the Company. In connection with the Closing, the Company issued to Mr. Tomasello 5,303,816 shares of its common stock. The Company may issue to Mr. Tomasello additional shares of common stock in the future depending on the Company’s performance and the achievement of certain earn-out thresholds.
The issuance of the shares of common stock of the Company to Mr. Tomasello is exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Section 4(a)(2) of the Securities Act. The Company has neither engaged in general solicitation or advertising nor paid any underwriting discounts or commissions to any person in connection with the issuance of such shares to Mr. Tomasello.
The Company had intended to issue a cash distribution to its stockholders prior to the Closing. In connection with this, the Company hired an investment banker to assist with analyzing the effect a cash distribution to shareholders would have on the Company’s short term and long term solvency. Following the review of all available information, the Board concluded that, based upon the Company’s cash needs over the next 3-4 years, particularly related to repayment of the Company Note (as defined below), a cash distribution was not advisable at this time.
Promissory Note
Upon the Closing, the Company issued to Mr. Tomasello a promissory note in the initial principal amount of $1,000,000 (the “Company Note”). The Company Note accrues interest at a rate of 5% per annum and matures on November 30, 2019. The Company Note may be adjusted upwards or downwards based upon the working capital delivered by AGA at the Closing. In addition, if certain service revenue targets are satisfied during either of two 12-month periods immediately following the Closing, the initial principal amount of the Company Note will be increased by an additional $1,000,000 at the end of each 12-month period, up to an aggregate additional amount of $2,000,000.
The foregoing description of the Company Note does not purport to be complete and is qualified in its entirety by reference to the full text of the Company Note, a copy of which is attached hereto as Exhibit 10.1 and incorporated herein by reference.
Employment Agreement
Upon the Closing and pursuant to the Merger Agreement, Mr. Tomasello entered into an employment agreement with the Company (the “Employment Agreement”), pursuant to which Mr. Tomasello is serving as interim Chief Executive Officer of the Company, and is receiving a base salary of $385,000 per year, a bonus of 2% of the Company’s EBITDA upon the Company exceeding $600,000 in EBITDA for the first 12 calendar months after Closing, and certain other benefits and perquisites customarily given by the Company to its executive officers. The Employment Agreement expires on November 30, 2017.
Mr. Tomasello is also entitled to severance in the form of monthly salary payments for the remainder of the original term under the Employment Agreement in the event his employment is terminated by the Company other than for cause or by Mr. Tomasello for good reason. In addition, if Mr. Tomasello’s employment is terminated for cause or due to his death or disability, he is entitled to payment of all amounts accrued prior to the date of termination. Under the Employment Agreement, “Good Reason” shall be deemed to occur upon: (i) failure by the Company to pay Mr. Tomasello’s base salary or other benefits to which he is entitled; (ii) a reduction in salary without Mr. Tomasello’s consent, unless any such reduction is otherwise part of an overall reduction in executive compensation experienced on a pro rata basis by other executive officers; or (iii) a material diminution of Mr. Tomasello’s authority, duties and responsibilities, other than in connection with hiring a new chief executive officer or other executive officer.
The foregoing description of the Employment Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Employment Agreement, a copy of which is attached hereto as Exhibit 10.2 and incorporated herein by reference.
Nondisclosure, Intellectual Property, Noncompetition and Nonsolicitation Agreement
Upon the Closing and pursuant to the Employment Agreement, Mr. Tomasello entered into a Nondisclosure, Intellectual Property, Noncompetition and Nonsolicitation agreement with the Company (the “NDA Agreement”), pursuant to which Mr. Tomasello agreed, for the term of his employment and for the longer of the period of time he is paid under the Employment Agreement or 12 months after the termination of his employment under the Employment Agreement to (i) keep confidential certain Company information, and (ii) refrain from certain activities which are competitive with the business of the Company. The NDA Agreement also contains a provision whereby Mr. Tomasello assigns any right to certain intellectual property to the Company.
The foregoing description of the NDA Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the NDA Agreement, a copy of which is attached hereto as Exhibit 10.3 and incorporated herein by reference.
Voting Agreement
Upon the Closing and pursuant to the Merger Agreement, Mr. Tomasello also entered into a voting agreement with the Company (the “Voting Agreement”), pursuant to which Mr. Tomasello has agreed to, among other things, (i) limit his ability to acquire or transfer shares of common stock of the Company for two years after the Closing, (ii) vote his shares of common stock of the Company consistently with the then-constituted Board, and (iii) with respect to the election of directors to the Board, vote his shares of common stock of the Company for the individuals nominated for election by the Nominating and Governance Committee of the Board.
The foregoing description of the Voting Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Voting Agreement, a copy of which is attached hereto as Exhibit 10.4 and incorporated herein by reference.
Working Capital
Under the Merger Agreement, AGA was not required to deliver to the Company any working capital at Closing. However, at Closing AGA delivered approximately $772,000 in estimated working capital (“Working Capital”), consisting of approximately $512,000 in fixed assets and inventory (“Fixed Assets and Inventory”), $587,000 in accounts receivable (“Accounts Receivable”), and $327,000 in accounts payable (“Accounts Payable”). Rather than having the entire Working Capital adjust the outstanding principal amount under the Company Note, the Company paid to Mr. Tomasello at Closing approximately $512,000 for the Fixed Assets and Inventory. In addition, the Company will not pay to Mr. Tomasello any amount for the Accounts Receivable that remain uncollected. The Company will pay to Mr. Tomasello an amount equal to the payments for Accounts Receivable received by the Company after offsetting against payments made by the Company for Accounts Payable. After 90 days from the Closing, excess Working Capital (other than Accounts Receivable and amounts previously paid to Mr. Tomasello on account of Fixed Assets and Inventory), if any, will be added to the principal amount due under the Company Note. Conversely, any negative Working Capital for which the Company has not already been compensated will reduce the principal amount due under the Company Note.