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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000.
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO _________.
Commission File Number: _____________
TOTAL ENTERTAINMENT INC.
-------------------------------------
(Name of Small Business Issuer in its Charter)
INDIANA 35-1504940
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization Identification No.)
(Zip Code)
1411 Peel Street, Suite 500, Montreal, Quebec, Canada H3A 1S5
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(Address of Principal Executive Offices)
(514) 842-6999
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [_]
As of August 11, 2000, there were 57,758,443 shares of the issuer's common
stock outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
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Total Entertainment, Inc.
Index
<TABLE>
<CAPTION>
Page
<S> <C>
Part I. Financial Information (Unaudited)
Condensed Consolidated Balance Sheets
December 31, 1999 and June 30, 2000 1
Condensed Consolidated Statements of Operations
Six Months Ended June 30, 2000 and 1999 2
Condensed Consolidated Statements of Operations
Three Months Ended June 30, 2000 and 1999 3
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2000 and 1999 4
Notes to Condensed Consolidated Financial Statements 5-10
Managements Discussion and Analysis of Financial
Condition and Results of Operations 11-14
Part II. Other Information 15-16
Signatures 17
</TABLE>
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Total Entertainment, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31,
1999
(Derived from
audited June 30,
financial 2000
statements) (unaudited)
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ASSETS
Current assets
Cash $ 23,865 $ 20,124
Accounts receivable 73,289 61,906
Note receivable 114,698
Prepaid expenses and other current assets 118,781
----------- -----------
Total current assets 97,154 315,509
Property and equipment
Computer equipment 302,862 309,241
Other furniture and fixtures 30,683 30,683
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333,545 339,924
Less accumulated depreciation 70,150 119,604
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263,395 220,320
Deferred licensing fees 308,037 134,678
Other assets 28,657 25,001
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$ 697,243 $ 695,508
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LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities
Accounts payable and accrued liabilities $ 163,271 $ 164,103
Customer account deposits 201,457 115,151
Current maturities of capital lease
obligations 24,838 19,143
Deferred compensation 540,000 710,000
Due to directors and stockholders 45,566 70,466
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Total current liabilities 975,132 1,078,863
Capital lease obligations, less current
maturities 37,639 15,752
Deferred income 464,682
Stockholders' equity (deficiency)
Common stock, $.001 par value, authorized
200,000,000 shares:
Issued and outstanding:57,388,443shares
At December 31, 1999 and 57,758,443 at
June 30, 2000 57,388 57,758
Additional paid-in capital 2,460,695 2,460,325
Accumulated deficit (3,298,293) (2,917,190)
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(780,210) (399,107)
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$ 697,243 $ 695,508
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1
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Total Entertainment Inc. and Subsidiaries
Consolidated Statements of Operations
Six months ended June 30, 2000 and 1999
(unaudited)
June 30, June 30,
1999 2000
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Revenues
Gaming revenues, net $ 311,901 $ 273,295
Commissions earned - 47,250
Maintenance and support 45,000
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311,901 365,545
Costs and expenses
Cost of operations 175,780 211,782
Research and development 16,288 39,858
Selling, general and administrative 554,480 648,031
Depreciation and amortization 17,000 49,454
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763,548 949,125
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OTHER INCOME
Gain on sale of website - 964,682
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(451,647) 381,103
INCOME TAXES 3,900
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NET INCOME (LOSS) FOR THE PERIOD $ (447,747) $ 381,103
=========== ===========
Earnings (loss) per common share
Basic $ (.01) $ .01
Diluted $ (.01) $ .00
Weighted-average shares outstanding used
in computing earnings (loss) per common
share
Basic 55,717,208 57,512,454
=========== ===========
Diluted 55,717,208 90,351,831
=========== ===========
2
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Total Entertainment Inc. and Subsidiaries
Consolidated Statements of Operations
Three Months Ended June 30, 2000 and 1999
(Unaudited)
June 30, June 30,
1999 2000
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Revenues
Gaming revenues, net $ 45,228 $ 110,611
Maintenance support 45,000
----------- -----------
45,228 155,611
Costs and expenses
Cost of operations 66,004 79,505
Research and development 12,288 23,972
Selling, general and administrative 283,250 386,081
Depreciation and amortization 10,149 24,942
----------- -----------
371,691 514,500
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OTHER INCOME
Gain on sale of website - 400,000
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(326,463) 41,111
INCOME TAXES 3,900
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NET INCOME (LOSS) FOR THE PERIOD $ (322,563) $ 41,111
=========== ===========
Earnings (loss) per common share
Basic $ (.01) $ .00
Diluted $ (.01) $ .00
Weighted-average shares outstanding used
in computing earnings (loss) per common
share
Basic 55,717,208 57,636,465
=========== ===========
Diluted 55,717,208 79,943,134
=========== ===========
3
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Total Entertainment Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
June 30, June 30,
1999 2000
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<S> <C> <C>
Cash flows from operating activities
Net income (loss) $(447,747) $ 381,103
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
Amortization of deferred licensing fees 61,020 70,859
Depreciation and amortization 17,000 49,454
Expenditures paid by directors and stockholders 51,700
Gain on sale of website (964,682)
Deferred income 150,000
Deferred compensation 170,000 170,000
Increase (decrease) in cash from changes in
operating assets and liabilities
Accounts receivable (25,610) 11,383
Prepaid expenses and other current assets 12,837 (12,625)
Accounts payable and accrued liabilities 21,108 832
Customer account deposits 22,262 (86,306)
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Net cash provided by (used in)
operating activities 32,570 (379,982)
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Cash flows from investing activities
Deferred licensing fees (2,041)
Purchase of computers and equipment (35,176) (6,379)
Proceeds from sale of website 100,000
Payments received on note receivable 45,302
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Net cash (used in)provided by
investing activities (37,217) 138,923
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Cash flows from financing activities
Principal payments on capital leases (27,582)
Advances from directors and
stockholders (10,511) 264,900
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Net cash provided by financing activities (10,511) 237,318
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NET INCREASE (DECREASE) IN CASH (15,158) (3,741)
Cash at beginning of period 30,390 23,865
--------- ---------
Cash at end of period $ 15,232 $ 20,124
========= =========
Supplementary Cash Flow Information:
Repayment of advances from directors and
stockholders through assignment of note
receivable (see Note D-2) $ 240,000
=========
</TABLE>
4
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TOTAL ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - Summary of Accounting Policies
------------------------------
The unaudited interim consolidated financial statements of Total
Entertainment, Inc. and Subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles and rules and
regulations of the Securities and Exchange Commission for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles of complete
financial statements.
In the opinion of the Company's management, the accompanying unaudited
financial statements contain all adjustments (consisting of normal recurring
entries) necessary to present fairly the financial position as of December 31,
1999 and June 30, 2000 and the results of operations for the three and six month
periods ended June 30, 2000 and 1999 and cash flows for the six months ended
June 30, 2000 and 1999, respectively.
The accounting policies followed by the Company are set forth in Note A
of the Company's financial statements as contained in the Form 10-KSB for the
year ended December 31, 1999 filed with the Securities and Exchange Commission.
The Form 10-KSB contains additional data and information with respect to
intangible assets, stock option plans, reserved shares, income taxes,
commitments, and other items and is incorporated by reference.
The results reported for the three and six month periods ended June 30,
2000 are not necessarily indicative of the results of operations which may be
expected for a full year.
5
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NOTE B - RECENT DEVELOPMENTS
Software Licensing Business
The Company has recently entered into a series of agreements through which
it offers customers, on a turnkey basis, a fully operational online casino to be
owned and operated by the customer through computer and other facilities in the
Dominican Republic (the "Dominican Hosting Facility"). The Company earns income
through license fees and other charges to these customers in connection with the
provision of casino gaming software, computer server hosting services, customer
service and administrative support, and a gaming license from the government of
the Dominican Republic. The Company also receives royalties on net winnings from
online casinos licensed by the Company. The Company commenced this business in
March 2000, and commission income of $47,000 was earned in the first half of
2000.
The Company has entered into several agreements to support the Dominican
Hosting Facility. Pursuant to a Marketing and License Agreement with Online
Gaming Systems, Ltd. ("OGS") dated January 14, 2000 (the "OGS Agreement"),
Intercapital Global has obtained an exclusive worldwide license to market and
sell certain Casino Software developed by OGS to persons seeking to establish
their own Internet casino Web sites. The Company may also market and sell the
OGS Casino Software to customers for purposes unrelated to the Dominican Hosting
Facility. In consideration for this license, Intercapital Global will pay OGS
67% of the purchase price for each product sold up to the first 15 products, and
60% for each product sold thereafter. Intercapital Global is entitled to retain
100% of all royalties it collects in connection with sales of OGS Casino
Software products. Intercapital Global and OGS have agreed to share in the
maintenance responsibilities with respect to the products sold and Intercapital
Global will pay 25% of all maintenance payments collected from purchasers to
OGS. As additional consideration, the Company has agreed to issue 1,500,000
shares of its Common Stock to OGS in installments over the five year term of the
OGS Agreement. Either party may terminate the agreement upon 30 days written
notice to the other. Although both parties are operating under the terms of the
OGS Agreement, in May, 2000 the Company issued 370,000 shares in the name of OGS
but did not release the certificate. Upon satisfactory resolution of certain
performance issues with the OGS software the Company will release the
certificate and issue the remaining shares to OGS in accordance with the terms
of the OGS Agreement.
In addition to the OGS Agreement, Intercapital Global has entered into an
Information Provider Services Agreement (the "Dominican Services Agreement")
dated February 1, 2000 with Caribbean Entertainment International, S.A. ("CEI").
Pursuant to the Dominican Services Agreement, CEI has agreed to install and
maintain certain Internet casino game and Web servers necessary to host online
casinos for Intercapital Global's software licensees in the Dominican Republic.
In order to allow Intercapital Global to license casino gaming software to
customers on a turnkey basis, whether supplied by OGS or another software
vendor, CEI has agreed to transfer to Intercapital Global ownership of a special
purpose entity formed to hold an Internet gaming license issued by the
government of the Dominican Republic. This entity will sublicense the right to
operate an Internet casino in the Dominican Republic to Intercapital Global's
software licensees who therefore will not need to obtain a gaming license
directly from the government.
In consideration for CEI licensing and hosting services, Intercapital
Global has agreed to pay to CEI a one time initial fee of $20,000 and a monthly
fee of $10,000 for three casinos plus an additional $2,000 per month for each
additional casino hosted. The term of the Dominican Services Agreement is five
years.
6
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Slotsvegas
In June 1999, the Company launched an Online Casino geared toward slots
players located at www.slotsvegas.com ("Slotsvegas"). Prior to launching, the
Company sold a 50% ownership interest and equal profit and loss participation in
the Slotsvegas site to Summerhill Gaming Limited, a Bahamian corporation
("SGL"), for $500,000 (paid either in cash to the Company or to certain vendors
for obligations incurred by the Company).
The agreement with SGL in substance represents the sale of future income
and was accounted for as deferred revenues in accordance with Emerging Issues
Task Force issue number 88-18. The amount amortized, as a reduction of expense,
will be calculated by computing the ratio of the amounts paid to SGL to
management's estimate of total payments expected to be made to SGL over four
years (which is management's estimate of the expected life of the website)
following the launch of the website, www.slotsvegas.com. At such time, if ever,
that the deferred income balance is fully amortized, any payments to SGL will be
charged in full to current earnings. Further, SGL will pay the Company 50% of
net losses of the slotsvegas site; accordingly, any future amounts received by
the Company will be recorded as a reduction of the slotsvegas site's operating
expenses.
Pursuant to a Purchase Agreement dated March 1, 2000 between Intercapital
Global and Netforfun.com , a publicly held Canadian company ("Netforfun"), the
Company sold its remaining 50% interest in the Slotsvegas site and related
assets and customer deposits to Netforfun for $2,000,000 to be received as
follows:
. $100,000 in cash, which was received by the Company upon signing of
the purchase agreement.
. $400,000 in the form of a five year promissory note bearing
interest at 9% per annum and payable in equal quarterly installments of
$24,910.02, commencing on July 1, 2000. In June, 2000, the note was
restructured into two notes for $160,000 and $240,000, respectively; and
. $1,500,000 in the form of 15,000,000 shares of Netforfun common
stock valued by the parties at $0.10 per share, prior to recapitalization
by Netforfun.
As part of the transaction, Intercapital Global has entered into a
Software Support Maintenance Agreement with Netforfun pursuant to which
Netforfun will pay $15,000 per month for an initial term of one year for
Intercapital Global to provide certain maintenance and support services in
connection with the Slotsvegas software. Netforfun will operate the Slotsvegas
casino through the Company's Dominican Hosting Facility.
Given the current financial position of Netforfun, and its stock valuation
profile, no amounts will be recognized by the Company relating to the sale of
the website for the common stock held or note receivable until the uncertainty
of realization is satisfied. The Purchase Agreement and the sale of Slotsvegas
to Netforfun was ratified by the Netforfun board of directors on May 7, 2000 and
the transaction is effective as of March 1, 2000. The Company and Netforfun
agreed in June, 2000 that any net winnings allocable to Netforfun were to be
first applied against the principal of the note receivable (See Note D-2). Based
upon the Netforfun share of the winnings of Slotsvegas to date (approximately
$35,000 as of June 30, 2000), and assignment of the $240,000 note as discussed
in Note D, the Company determined that the uncertainty of the realization of the
note receivable was satisfied, and that portion of the gain on the sale of the
website was recognized in the quarter ended June 30, 2000.
As a result of the Netforfun transaction and certain agreements with SGL
which modified (relieving the Company of any continuing obligations and risks
with respect to the Slotsvegas website) the original SGL agreement, the
unamortized deferred income was recorded as gain on the sale of websites in the
period ended March 31, 2000.
7
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NOTE C - Earnings Per Share of Common Stock
----------------------------------
The Company computes earnings per share in accordance with Statement of
Financial Accounting Standards No. 128 Earnings per Share (SFAS 128) which
specifies the compilation, presentation and disclosure requirements for earnings
per share for entities with publicly held common stock or instruments which are
potentially common stock.
Basic earnings per common share is determined by dividing the net income by
the weighted average number of shares of common stock outstanding. Diluted
earnings per common share is determined by dividing the net income by the
weighted number of shares outstanding and dilutive common equivalent shares from
stock options and warrants. A reconciliation of the weighted average basic
common shares outstanding to weighted average diluted common shares outstanding
follows:
Six Months Ended
June 30, 2000 June 30, 1999
------------- --------------
Basic Shares 57,512,454 55,717,208
Dilution: Stock Options 32,839,377 -
----------- -----------
Diluted Shares 90,351,831 55,717,208
=========== ===========
Income (loss) available to
common shareholders 381,103 (447,747)
Basic earnings (loss) per share $ .01 $ (.01)
Diluted earnings (loss) per share $ .00 $ (.01)
Three Months Ended
June 30, 2000 June 30, 1999
------------- --------------
Basic Shares 57,636,465 55,717,208
Dilution: Stock Options 22,306,669 -
----------- -----------
Diluted Shares 79,943,134 55,717,208
=========== ===========
Income (loss) available to
common shareholders $ 41,111 $ (322,563)
Basic earnings (loss) per share $ .00 $ (.01)
Diluted earnings (loss) per share $ .00 $ (.01)
8
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NOTE D - Related Party Transactions
--------------------------
1. Deferred Compensation
During the first half of 2000 and 1999, $170,000 of deferred compensation was
recorded for the officers of the Company. Deferred compensation totaled
approximately $710,000 at June 30, 2000. The deferred salaries shall be paid
to such persons in cash or stock of the Company at such future time as each
officer may elect by written notice to the Board of Directors of the Company
to be paid. The Company anticipates deferring a substantial portion of the
officers' salaries in 2000.
2. Due to Directors and stockholders
During the first half of 2000, Intercapital Asset Management Inc., an entity
which is controlled by the Company's President and Chief Executive Officer,
advanced $240,000 to the Company. The Company satisfied these advances
effective June 30, 2000 by assigning $240,000 of it's note receivable from
Netforfun to Intercapital Asset Management (see Note B).
From time to time, directors and stockholders of the Company have directly
paid certain Company expenses. Such transactions have been recorded as due to
directors and stockholders, and do not bear interest. There are no scheduled
terms of repayment of such amounts.
NOTE E - Commitments and Contingencies
---------------------------
1. Legislative Risks and Uncertainties
The Company and its subsidiaries are subject to applicable laws in the
jurisdictions in which they operate or offer services. While some
jurisdictions have attempted to restrict or prohibit Internet gaming, other
jurisdictions, such as several Caribbean countries, Australia and certain
native Indian territories, have taken the position that Internet gaming is
legal and/or have adopted, or are in the process of reviewing, legislation to
regulate Internet gaming in such jurisdictions. As companies and consumers
involved in Internet gaming are located around the globe, there is
uncertainty regarding exactly which government has jurisdiction or authority
to regulate or legislate with respect to various aspects of the industry.
Furthermore, it may be difficult to identify or differentiate gaming-related
transactions from other Internet activities and link those transmissions to
specific users, in turn making enforcement of legislation aimed at
restricting Internet gaming activities difficult. The uncertainty surrounding
the regulation of Internet gaming could have a material adverse effect on the
Company's business, revenues, operating results and financial condition.
Pending United States Legislation and Other Existing Laws
The United States Government or the governments of other jurisdictions may in
the future adopt legislation that restricts or prohibits Internet gaming.
After previous similar bills failed to pass in 1998, in November, 1999, the
United States Senate passed a bill intended to prohibit and criminalize
Internet gambling (other than certain stated regulated industries). A similar
bill recently failed to pass the United States House of Representatives.
There can be no assurance as to whether the Senate bill or any similar bill
will become law.
9
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In addition, existing U.S. Federal statutes and state laws could be construed
to prohibit or restrict gaming through the use of the Internet, and there is
a risk that government authorities may view the Company as having violated
such statutes or laws, notwithstanding the Company's gaming licenses issued
to Intercapital Global by the governments of Honduras and the Dominican
Republic (Pending). Several State Attorney Generals and court decisions have
upheld the applicability of state antigambling laws to Internet casino
companies.
Accordingly, there is a risk that criminal or civil proceedings could be
initiated in the United States or other jurisdictions against the Company
and/or its employees, and such proceedings could involve substantial
litigation expenses, penalties, fines, diversion of the attention of key
executives, injunctions or other prohibitions being invoked against the
Company and/or its employees. Such proceedings could have a material adverse
effect on the Company's business, revenues, operating results and financial
condition.
In addition, as electronic commerce further develops, it may generally be
subject to government regulation. Current laws which predate or are
incompatible with Internet electronic commerce may be enforced in a manner
that restricts the electronics commerce market. Any such developments could
have a material adverse effect on the Company's business, revenues, operating
results and financial condition.
The Company intends to minimize the potential legal risks by continuing to
conduct its Internet business from offshore locations that permit online
gaming and by increasing its marketing efforts in Asia and other foreign
jurisdictions. There is no assurance, however, that these efforts will be
successful in mitigating the substantial legal risks and uncertainties
associated with the Company's internet gaming business.
2. Litigation
On October 11, 1999, the Company filed a demand for arbitration (the
"Statement of Claim") with the American Arbitration Association in Chicago,
Illinois (the "AAA Action") against Robert W. Knoblock, Carole Knoblock and
Jille Knoblock (collectively, the "Respondents"), the officers, directors
and/or principal shareholders of Kit Farms Inc ("Kit"), predecessor to the
Company. Specifically, the Company and another claimant (the "Claimants")
allege that in connection with the January 1998 reverse merger between Kit
and Mint Energy Inc, a former subsidiary of the company, the Respondents
breached certain representations and warranties they made in connection with
the outstanding number of shares and/or fraudulently misrepresented the
outstanding number of shares of Kit. The Claimants are seeking damages of
$2,700,000 plus interest, costs and attorney fees.
On November 15, 1999, the Respondents filed an answer and motion to dismiss
the Statement of Claim and have asserted various defenses in connection
therewith. In connection with their defense of the AAA Action, on December 8,
1999, the Respondents filed a separate action against the Claimants in the
Porter Superior Court in Indiana (the "State Court Action"). In the State
Court Action, the Respondents are seeking damages in excess of $5.5 million
arising from the Company's refusal to remove restrictive legends on certain
Company common stock certificates held by the Respondents. The Company moved
to compel arbitration of the claims brought in the State Court Action and
such motion was denied. The Company chose not to appeal the decision and has
asserted its claims set forth in the AAA Action, as counterclaims in the
State Court Action. All parties in the State Court Action are currently
engaged in discovery.
10
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion of the financial condition and results of our
operations should be read in conjunction with our financial statements and
related notes appearing elsewhere in this Form 10-QSB and Form 10-KSB for the
year ended December 31, 1999. Except for the historical information contained
herein, the discussion in this Form 10-QSB contains forward-looking statements
that involve risks, uncertainties and assumptions such as statements of our
plans, objectives, expectations and intentions. The cautionary statements made
in this Form 10-QSB should be read as being applicable to all related forward-
looking statements wherever they appear in this document. The actual results,
levels of activity, performance, achievements and prospects could differ
materially from those discussed below. Factors that could cause or contribute to
such differences include those discussed elsewhere in this Form 10-QSB.
Overview
From 1996 through August 1998, we were considered a development stage
company. On September 12, 1998, we launched the www.theonlinecasino.com Web site
and began generating revenues. In the fiscal year ended December 31, 1999, we
continued these initial activities and also focused on:
. Increasing marketing activities;
. Launching new online gaming Web sites;
. Implementing improved gaming software licensed from OGS (f/k/a/
Atlantic Entertainment International, Ltd.);
. Improving the functionality and appearance of the Web sites; and
. Enhancing our financial, infrastructure and administrative
capabilities.
We intend to continue to increase our marketing and administrative
activities, and to increase other operating expense as required to build our
business. In the first and second quarters of 2000, we focused our activities on
the
following:
. Developing our turnkey solution business model for persons who wish to
enter the online gaming industry through ownership of their own online
casino;
. Establishing a Marketing and License Agreement with OGS to provide
software, maintenance and technical support;
. Establishing an Information Provider Services Agreement with CEI;
We have incurred significant losses and negative cash flows from operations
since inception due to the initial research, technology infrastructure
development and starting of our business. Our revenues have not been sufficient
to cover our expenses to date. In order to significantly increase revenues we
will be required to incur significant advertising and promotional expenses. We
anticipate additional revenues to occur in the fall and winter months, when
wagering on professional and college football and, to a lesser extent
basketball, and internet gaming activities as a whole, are expected to be at
their highest levels. In anticipation of an expansion of our operations, we have
recently employed additional management personnel. We intend to employ
additional personnel in such areas as sales, technical support and finance.
These actual and proposed increases in personnel will significantly increase our
selling, general and administrative expenses.
11
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Our limited operating history and the uncertain nature of the markets we
address or intend to address make prediction of our future results of operations
difficult. Our operations may never generate significant revenues, and we may
never achieve profitable operations. Our quarterly and annual operating results
are likely to fluctuate significantly in the future due to a variety of factors,
including the seasonal effects of the sportsbook operation, many of which are
outside our control.
Results of Operations
Revenues. Net revenues for the second quarter of 2000 were $155,611 compared
to $45,228 for the same 1999 period. Net revenues for six months ended June 30,
2000 were approximately $366,000, compared to $312,000 for the six months ended
June 30, 1999.Our revenues are recognized upon completion of the sporting event
or game of chance. Sporting event revenues have a strong seasonality towards
U.S. professional and college football and basketball seasons in the fall and
winter months. The net revenue from the casino for the three months ended June
30, 2000 were approximately 36% more than the comparable 1999 three months, and
20% less for the six months ended June 30, 2000 compared to the same period
because of the disposition of the www.slotsvegas website and lower traffic on
Theonlinecasino website due to the casino being offline while software upgrades
occurred for a part of the 2000 first quarter. The Company's web sites were
essentially non-operational for approximately two weeks in May 1999, while the
gaming software was replaced with the Atlantic Software Porducts. Net revenues
from the sportsbook operations increased approximately $58,000 for the three
months ended June 30, 2000 and $4,000 for the six months ended June 30, 2000
over the same periods in 1999. Substantially all of the sportsbook revenues
occurred, historically, in the first and fourth quarters of the year when both
gross volume and the hold (net winnings percentage by the Company) were higher
than in subsequent quarters. The hold on baseball games in the summer months is
typically less than the hold for football games. The volume of wagering was
significantly higher in the first quarter of the year, due principally to the
seasonal effect of online activity, which typically increases in the winter
months.
In the first quarter of 2000 the Company commenced its software licensing
business and recorded commissions of $47,250. The revenues from maintenance and
support of the website sold to Netforfun and SGL were $45,000 for the second
quarter of 2000, which was the initial quarter that the Company provided this
type of service.
Cost of Operations. Cost of operations consists primarily of software
licensing and maintenance costs, royalty payments, telecommunications and credit
card processing fees and internet service provider costs. For the three and six
months ended June 30, 2000 such cost amounted to $80,000 and $212,000,
respectively as compared to $66,000 and $176,000, respectively for the same
periods in 1999. The increases are a result of increased travel costs for the
software licensing business and higher software licensing and telecommunications
costs for both our owned and managed casino websites, offset partially by the
disposition of the www.slotsvegas website and lower volume of development work
on new websites.
Research and Development Expenses. Research and Development expenses consist
principally of costs associated with the development and implementation of the
Web sites, developing a methodology for online gaming and investigating the
development of certain software products. Total expenses for the three and six
months ended June 30, 2000 were approximately $24,000 and $40,000, respectively
compared to $12,000 and $16,000, respectively for the same period of 1999.
12
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General and Administrative Expenses. General and administrative expenses
consist primarily of salary costs and administrative functions as well as
professional service fees. Total general and administrative expenses for the
three months ended June 30, 2000 and 1999 were approximately $386,000 and
$283,000. For the six months ended June 30, 2000 and 1999 general and
administrative expenses were approximately $648,000 and $554,000, respectively.
The increase is attributable to an increase in salaries, travel and meeting
costs, to build our business, and professional fees which was offset by a
reduction in advertising and promotion costs.
Depreciation and Amortization. Depreciation and amortization expenses
consist primarily of the depreciation of furniture and in-house computers,
servers and telecommunications equipment. Total depreciation and amortization
expense was approximately $25,000 and $50,000 for the three and six months ended
June 30, 2000 and $10,000 and $17,000 for the same periods for 1999. The
increase reflects both higher volumes of equipment owned and a depreciation on
assets purchased in the latter part of 1999.
Other Income. Gain on sale of website, including recognition of previously
deferred income on slotsvegas.com, amounted to $964,682, for the six months
ended June 30, 2000. In 1999, we received $500,000 for the transfer of a 50%
profit participation in www.slotsvegas.com website to Summerhill Gaming. In
2000, we sold the remaining interest in the website for an estimated $2 million
(consisting of cash, notes receivable and common stock). Since we have no
continuing ownership in the website or risks associated with the website, the
previously recorded deferred revenue of and cash proceeds from the sale to
Netforfun were recorded as other income in the first quarter of 2000. Given the
current financial position of Netforfun, and its stock valuation profile, no
amounts will be recognized by the Company for the common stock until the
uncertainty of realization is satisfied. The $400,000 recorded in the second
quarter of 2000 represents the note received at the time of sale. Effective
June 30, 2000, the note was restructured into two notes for $160,000 and
$240,000. Intercapital Asset Management, Inc. accepted the note payable from
Netforfun as satisfaction of $240,000 they had advanced the Company in the first
six months of 2000. In the second quarter of 2000 the net winnings from the
slotsvegas site were approximately $35,000 which the Company retained and
applied toward the note receivable. In addition Netforfun paid $10,000 on the
note in the second quarter.
Income Taxes. We have incurred net losses for each period from inception
through December 31, 1999. Mint and affiliates (predecessors to the Company) and
Total Entertainment Inc., losses generated in prior years may not be available
to offset future taxable income. We are expecting to file such tax returns in
the near future, which could yield approximately $2,000,000 of net operating
loss carry forwards and deferred expenses as of December 31, 1999 for United
States federal income tax purposes, which will expire in the year 2018. Due to
the uncertainty of obtaining such benefits and of future profitability, a
valuation allowance equal to the deferred tax assets has been recorded. Changes
in ownership resulting from transactions among our stockholders and sales of
common stock by us, may limit the future annual realization of the tax net
operating loss carry forwards under Section 382 of the Internal Revenue Code of
1986. Further, a significant portion of our business is conducted in offshore
entities, which do not impose income taxes. Income in the first six months of
2000 is attributable to non-taxable jurisdictions or is offset by net
operating loss carryforwards. Accordingly, no provision for income taxes is
required.
13
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Liquidity and Capital Resources.
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of the
Company as a going concern. We have incurred losses from inception through
December 31, 1999, and have a deficiency in working capital of approximately
$763,000 at June 30, 2000, including deferred compensation payable of $710,000.
There are also legislative risks and uncertainties regarding online casinos, and
certain litigation against the Company; the cost of defending such actions could
be significant. We have financed our operations to date primarily through the
deferral of officer's salaries, advances made by affiliates and advances made by
SGL (through the sale of a 50% ownership interest in the Slotsvegas site and the
working capital loan agreement) and the sale of the remaining interest in the
Slotsvegas site.
Net cash provided by (used in) operating activities was approximately
$(380,000)and $33,000 for the six months ended June 30, 2000 and 1999.
During the first half of 2000, we borrowed funds from affiliates to fund our
operations under short-term advances without fixed repayment terms. These
advances were satisfied by assigment of part of the note receivable from
Netforfun.
Our material capital commitments consist of obligations under facilities and
operating leases. We anticipate that we will experience an increase in our
capital expenditures and lease commitments consistent with our anticipated
growth in operations, infrastructure and personnel. We anticipate devoting
additional resources to building the strength of our brand name, through
increased marketing and sales efforts.
We may seek additional funding through public or private financing or other
arrangements. Adequate funds may not be available when needed or may not be
available on terms acceptable to us. If additional funds are raised by issuing
equity securities, dilution to existing stockholders could result. If funding is
insufficient at any time in the future, we may be unable to develop or enhance
our products and services, take advantage of business opportunities or respond
to competitive pressures, any of which could have a material adverse effect on
our business, financial condition and results of operations.
14
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PART II-OTHER INFORMATION
Item 1. Legal Proceedings
NOT APPLICABLE
Item 2. Changes in Securities and Use of Proceeds
Pursuant to the OGS Agreement, in May 2000, the Company issued 370,000
shares of its common stock to OGS as part of its commitment under the
agreement to issue 1,500,000 shares of common stock to OGS over a five
year period as partial consideration for the grant by OGS of an
exclusive worldwide license to market and sell certain casino gaming
software developed by OGS. The certificate for these shares is being
held by the Company pending resolution of certain performance issues
with the OGS software. OGS is a publicly traded company and a
sophisticated investor with access to all relevant information
concerning the Company's business and operations. Accordingly, the
issuance of common stock to OGS did not involve a public offering and
was exempt from the registration requirements of the Securities Act
pursuant to the exemption from registration provided by Section 4(2)
thereof.
NOT APPLICABLE
Item 3. Defaults upon Senior Securities
NOT APPLICABLE
Item 4. Submission of Matters to a Vote of Security Holders
NOT APPLICABLE
Item 5. Other Information
NOT APPLICABLE
15
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Certificate of Incorporation and amendments*
3.2 Bylaws
10.1 Merger Agreement dated November 17, 1997 entered into between Mint
Energy Corporation and Kit Farms Inc., as amended by the First
Amendment thereto dated January 15, 1998, and Plan of
Merger/Exchange dated January 23, 1998*
10.2 License Agreements dated April 9, 1999 and June 23, 1999 between
Intercapital Global Fund, Ltd. and Online Gaming Systems, Ltd
(f/k/a. Atlantic International Entertainment, Ltd.), and related
Software Support Maintenance Agreements*
10.3 Amended and Restated Purchase Agreement dated May 5, 1999 between
Intercapital Global Fund, Ltd. and Summerhill Gaming Limited*
10.4 Agreement dated August 18, 1998 between Intercapital Global Fund,
Ltd. and MPACT Immedia Transaction Services Ltd.*
10.5 Equipment Lease Agreement dated August 18, 1999 between Total
Entertainment Canada, Ltd. (formerly Intercapital Canada Ltd.) and
Dell Financial Services Canada Limited*
10.6 Lease Agreement dated June 22, 1999 between Marine Properties
Ltd., as Landlord, and Total Entertainment Canada, Ltd. (formerly
Intercapital Canada Ltd.), as Tenant*
10.7 Lease Agreement dated July 30, 1999 between Devonshire House,
Ltd., as Landlord, and Intercapital Global Fund, Ltd., as Tenant*
10.8 Revolving Credit Note dated May 5, 1999 payable to Summerhill
Gaming Limited*
10.9 Marketing and License Agreement dated January 14, 2000 between
Intercapital Global and Online Gaming Systems, Ltd.**
10.10 Information Services Provider Agreement dated February 1, 2000
between Intercapital Global and Caribbean Entertainment
International, S.A.**
10.11 Purchase Agreement dated March 1, 2000 between Intecapital Global
and Netforfun.com Inc., and related Software Support Maintenance
Agreement**
10.12 Agreement with Summerhill Gaming Limited dated March 24, 2000
regarding debt to equity conversion**
27 Financial Data Schedule
* Incorporated by reference from the Company's Form 10-SB Registration Statement
dated December 14, 1999.
** Incorporated by reference from the Company's Form 10-KSB Annual Report
December 31, 1999.
(c) No reports on Form 8-K were filed during the quarter for which this
report is filed.
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SIGNATURES
In accordance with the Securities Exchange Act of 1934, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TOTAL ENTERTAINMENT INC.
Date: August 14, 2000 By /s/ Sandy J. Masselli, Jr.
-----------------------------
Sandy J. Masselli, Jr.,
Chairman of the Board and Chief Executive
Officer
Date: August 14, 2000 By /s/ Mitchell H. Brown
-------------------------
Mitchell H. Brown
President and Chief Operating Officer
17
