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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-KSB
(Mark One)
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
For the fiscal year ended December 31, 1999.
OR
|_| 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.
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(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.)
1411 Peel Street, Suite 500, Montreal, Quebec, Canada H3A 1S5
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(Address of Principal Executive Offices) (Zip Code)
(514) 842-6999
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(Issuer's telephone number)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange
on Which Registered
- ----------------------------------- ----------------------------------------
None None
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Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE $.001 PER SHARE
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(Title of Class)
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 [ ] No [X]
Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year were $581,000.
The aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was sold, or the average bid and asked prices of such common equity, as
of February 11, 2000 was $44,830,754.
As of March 27, 2000, there were 57,388,443 shares of the issuer's common
stock outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
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PART 1
Statements contained in the annual report that are not historical facts
are forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are subject to
risks and uncertainties, which could cause actual results to differ materially
from estimated results. Such risks and uncertainties are detailed in filings
with the Securities and Exchange Commission, including without limitation in
Item 1-- "DESCRIPTION OF BUSINESS" and Item 6-- "MANAGEMENT DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION" below.
Item 1. DESCRIPTION OF BUSINESS
Overview
Total Entertainment Inc. (the "Company") is a holding company, which
through its two wholly-owned subsidiaries, Intercapital Global Fund, Ltd., an
Antiguan corporation ("Intercapital Global"), and Total Entertainment Canada,
Ltd., a Quebec corporation ("TE Canada"), owns and operates interactive
software-based games of chance and sports wagering facilities which are offered
as an online service accessible world-wide through the Internet. The Company
also markets and sells casino gaming software, server hosting and related
support services on a turnkey basis to customers who wish to establish and
operate their own Internet casinos.
Intercapital Global, based in The Bahamas, is the owner and operator of
several Internet casino Web sites (collectively, the "Online Casinos"),
including the site located at www.theonlinecasino.com, also known as "The Online
Casino & Sportsbook". Intercapital Global licenses the casino gaming and
sportsbook software and the electronic commerce (e-cash) and transaction
processing software (collectively, "Casino Software") utilized by the Online
Casinos from Online Gaming Systems, Ltd. ("OGS"), a Florida corporation (f/k/a
Atlantic International Entertainment Ltd). Intercapital Global also has the
exclusive license to market and sell certain Casino Software developed by OGS.
Intercapital Global earns income through profits associated with the
wagering activities of its Online Casino users. Intercapital Global also intends
to earn income from licensees of OGS' Casino Software, including licensees who
operate their own Internet casinos through software, facilities and support
services provided by Intercapital Global.
TE Canada, based in Montreal, Canada, provides Intercapital Global with
technical support, customer support and general administrative services.
The Company's shares of common stock, par value $.001 per share (the
"Common Stock"), currently trade on the OTC bulletin board market maintained by
Nasdaq under the symbol TTLN. Unless otherwise indicated, all descriptions
herein of the business of the Company
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shall also be deemed to include the business of the Company's wholly-owned
subsidiaries, Intercapital Global and TE Canada.
Products and Services
Intercapital Global owns and operates Online Casinos located at
www.theonlinecasino.com, its bingo site located at www.bingonthenet.com and its
three Asian oriented sites located at www.dragongaming.com,
www.theluckydragoncasino.com, and www.dragonbet.com (collectively, the "Asian
Sites"). Intercapital Global sold 50% of its Online Casino at www.slotvegas.
com in May 1999 and has recently entered into an agreement to sell the remaining
50%.
The Online Casino games use software technology that provides enhanced
sound and graphics, and allows real time interactivity within a user's own Web
browser. A customer has the option of loading and playing casino games through
their Web browser with no downloading, or a customer may download either the
entire Web site or individual games in order to achieve faster play. Once the
necessary software has been downloaded, a customer is required to provide
certain personal and financial information, including a user name and password,
in order to open an account. A person need not open an account in order to
browse the Online Casinos without playing any games. In order to play games and
make "live" wagers, a person must purchase electronic cash by making one or more
credit card deposits into the person's account.
Once a customer has an account balance, the customer may play various
casino style games which currently include Slots, Blackjack, Video Poker,
Roulette, Mini Baccarat, Sic Bo, Keno, Scratch Off and Bingo Blast. Many of the
games have several variations with minimum and maximum betting ranges. The
customer may also open a separate account to place wagers on sporting events,
including all major professional and collegiate sports and other events with
respect to which a betting line (or sportsbook) has been established by the
oddsmakers in Las Vegas. Winnings (in U.S. dollars) are automatically credited
to a customer's account. Withdrawals are effected by credit to the customer's
credit card up to the amount deposited via credit card, with the balance sent by
check. A customer is free to withdraw all or part of his winnings, review his
account balance or make additional deposits to his account at any time.
The Company does not require patrons to maintain a minimum account
balance or place any restrictions on amounts accumulated through winnings. The
Company has, however, established a maximum bet limit for new customers,
although it may, at its discretion, grant custom wagering and account options to
its regular customers based upon their established profiles. At the present
time, the Company does not intend to extend credit services to its patrons. In
addition to the foregoing, management has agreed to adhere to the Code of
Conduct of the Interactive Gaming Council, a gaming industry organization of
which the Company is a member. Among other things, the Code of Conduct requires
Interactive Gaming Council members to post loss limits and to provide referrals
and direct access to help and counseling organizations as a means to identify
and curtail compulsive gambling. Moreover, the Company's managers may suspend a
patron's account activity at any time if they suspect or observe compulsive
gambling behavior. Notwithstanding these procedures, however, there can be no
assurance that the Company will be
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able to successfully identify or curtail compulsive gambling by its patrons.
The Company has designed the Online Casinos to be an entertaining,
interactive, real time playing experience that provides maximum privacy and
security to the customer. With respect to customer privacy and security, the
Company does not disclose any personal or wagering information relating to any
customer, and access to the customer's account (e.g., for account review,
deposits or cash-out) is password protected. Customers may access an Online
Casino through the use of personal computers. At present, only the Online Casino
sportsbook and not the casino games are accessible and able to be downloaded
through Web-TV. In the future, the Company anticipates that customers will have
access to the entire Online Casino through Web-TV.
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 facilites 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 expects to
commence this business in the spring of 2000.
Through Intercapital Global, the Company has entered into several
agreements to support the Dominican Hosting Facility. Pursuant to a Marketing
and License Agreement with 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
agreement. Either party may terminate the agreement upon 30 days written notice
to the other.
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
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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's licensing and hosting services, Intercapital
Global has agreed to pay a 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.
Recent Developments
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).
Pursuant to a Purchase Agreement dated March 1, 2000 between
Intercapital Global and Netforfun.com Inc., a publicly held Canadian company
("Netforfun"), the Company is currently in the process of selling its remaining
50% interest in the Slotsvegas site and related assets and customer deposits to
Netforfun for $2,000,000 to be payable as follows:
. $100,000 in cash upon signing of the purchase agreement (this
amount has been paid to the Company as a non-refundable deposit
pending ratification of the transaction by Netforfun
shareholders);
. $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; and
. $1,500,000 in the form of 15,000,000 shares of Netforfun common
stock valued at $0.10 per share.
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.
The Purchase Agreement and the sale of Slotsvegas to Netforfun has not
been finalized and is subject to ratification by Netforfun shareholders at a
special shareholders meeting scheduled for May 23, 2000.
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New Products
The Company has recently established its own portal site located at
www.go2total.com which presently offers news, business, sports and entertainment
information, as well as free email services. The Company intends to expand the
portal site and to generate revenues therefrom by linking it to various retail
outlets that offer general products and merchandise such as wine, books, videos,
toys and other products.
In addition, the Company has recently introduced Bingo Blast, a new
interactive multi- player game created and licensed by OGS. Bingo Blast is a
pari-mutuel style game in which the betters wager against each other and not
against the house, thereby lowering the house exposure to zero. The Company
conducts several daily bingo sessions in which prizes can be won from both a
regular prize pool and from a progressive jackpot comprised of a percentage
collected from each card purchased. The Company plans to introduce Lotto Magic,
another new pari- mutuel style interactive game licensed from OGS, sometime in
2000.
Technology and Infrastructure
Technical support, customer service (by email and telephone), and
general administrative services for the Online Casinos are provided by the
Company's wholly-owned Canadian subsidiary, TE Canada, out of its offices in
Montreal, Quebec.
In addition to enhanced sound and graphics software, the Online Casinos
use state-of-the- art casino gaming and sportsbook software licensed from OGS
pursuant to four nonexclusive, four year term License Agreements (the "License
Agreements"). Under two License Agreements dated April 9, 1999 relating to the
sportsbook and certain casino gaming software, as consideration for the licenses
granted thereunder, Intercapital Global paid OGS a total of $247,500 on signing.
Under the two License Agreements dated June 23, 1999 relating to Bingo Blast and
Lotto Magic (which the Company intends to install in future), as consideration
for the licenses granted thereunder, Intercapital Global paid OGS a total of
$102,500 on signing. The Company is no longer obligated to make royalty payments
to OGS under the License Agreements.
In addition, to support the Dominican Hosting Facility, OGS has granted
an exclusive license to Intercapital Global to market and sell certain OGS
Casino Software to customers wishing to establish their own online casinos, as
well as for other purposes. OGS has agreed to provide certain maintenance and
support services in connection with the licensed software.
Intercapital Global has entered into an Agreement dated August 18, 1998
(the "Processing Agreement") with MPACT Immedia Transaction Services Ltd., a
Bermuda company ("MPACT"), pursuant to which MPACT performs various credit card
approval and processing services to facilitate Online Casino transactions in
return for a weekly fee equal to 5.75% of all approved and settled credit card
transactions, subject to a minimum fee of $2,000 per month. The Processing
Agreement is terminable by Intercapital Global, with or without cause, on 15
days notice to MPACT. Intercapital Global's obligations to MPACT under the
Agreement are personally guaranteed by Sandy J. Masselli, Jr., the Chief
Executive Officer of the Company.
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The Company's network is connected to the Internet via redundant
high-speed fiber, ensuring multiple backup connections to the Internet. This
high performance network infrastructure ensures reliable and responsive game
play for the Company's users/players. The system is composed of high speed Dell
servers and 3Com networking equipment. Most of the critical system components,
such as the game servers and Web servers, are distributed across multiple
machines, which protect the gaming service from failures due to malfunctioning
equipment. The highly scalable nature of the Company's system design makes
provisioning for additional capacity relatively simple. The network monitoring
staff tracks the system at all times to maintain constant awareness of the
system's operating parameters. New equipment is installed when necessary to
compensate for increased activity or anticipated peak demands for popular
events.
The high quality Internet connection at the Company's network facility
in The Bahamas is provided by The Bahamas Telephone Company (Batelco) and
contributes to responsive game play. Each gaming transaction is stored on an SQL
database that is replicated for redundancy and backed up daily to prevent data
loss, and the gaming components communicate using 128 bit encryption to protect
sensitive data from potential hackers.
TE Canada, a wholly-owned subsidiary of the Company, was formed on
October 15, 1997 in order to provide customer and technical support services to
Intercapital Global's Online Casino business.
Distribution and Marketing
The Company markets its Online Casinos to an international clientele
consisting of individuals located throughout the world who are at least 18 years
of age and have access to the Internet through a personal computer (and, to a
limited extent, through a Web-TV). According to the International Data
Corporation, the number of Internet users is projected to grow from 142 million
people at the end of 1998 to 502 million people in 2002. In particular, Internet
use is expected to undergo significant growth in the Pacific Rim region over the
next five years. The Company also recognizes that a substantial amount of
business is now conducted over the Internet and that such business is projected
to grow significantly over the next few years.
In order to create an awareness of the Company's existence among
individuals in the target markets, the Company intends to focus its marketing
efforts primarily on traditional media advertising, online promotions, business
development, third-party relationships and social programs. In addition, the
Company has established various links at other Internet Web sites which will
enable users of the other sites (e.g., Amazon.com) to link up to the Company's
Web sites.
In order to expand its Asian business, the Company recently established
the Asian Sites which became operational on June 15, 1999. The Asian Sites are
available in Chinese and English and contain various gaming features oriented
toward the Asian market.
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In the future, the Company intends to develop online gaming sites and
other e-businesses for third parties. The Company anticipates that this strategy
will be linked to its overall strategy of expansion by aligning itself with
strategic local partners familiar with local laws and customs.
To keep pace with technological changes and market conditions, the
Company intends to update its Web sites on a quarterly basis. Such quarterly
updates are expected to include new games and sporting events and new versions
of existing games, as well as technological enhancements such as shorter
downloading time, improved sound and graphics and broader software
compatibility.
Competition
Given the popularity of the Internet in general and the relatively high
profit margins and low overhead associated with the Internet gambling business
in particular, especially as compared to traditional physical casinos, the
Company faces strong competition in what is expected to be a rapidly growing
global industry. The Company is aware of several other companies that currently
offer casino gambling services on the Internet similar to those of the Company.
Some of the Company's primary competitors include CryptoLogic, Inc., Venturetech
Inc., GLC Limited, GoCall Inc., Cybergames Inc., Youbet.com., Internet Casinos
Ltd., Wager Net Inc., Casinos of the South Pacific, World Wide Web Casinos and
Virtual Vegas. Some of these competitors offer entrepreneurs full software,
accounting, marketing and other forms of support to enable such persons to
operate their own Internet casino Web sites.
The barrier to entry to most Internet markets, including the gambling
segment, is relatively low making it accessible to a wide number of entities and
individuals. In the Internet gaming industry, the required technological and
management expertise can be purchased or licensed from existing vendors. Thus,
in addition to those known competitors of the Company, several new competitors
are likely to emerge in the near future.
The Company's computer technology for the Online Casinos is
characterized by rapid and significant technological change in the computer,
software and telecommunication industries. Many entities are engaged in research
and development with respect to offering gaming services on the Internet. The
Company's competitors may develop technologies and products that are more
effective and efficient than the Company's products, and the Company's products
may be rendered obsolete by such developments. In addition, other companies with
greater technological and financial resources may develop gaming services over
the Internet with better capabilities than the Company's.
Patents, Trademarks, Licenses, Royalty Agreements
As of the date hereof, the Company does not own or otherwise control
any patents,
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copyrights or trademarks. As the Company's research and development efforts
progress, the Company will attempt to protect its own proprietary technology by
relying on trade secret laws and non-disclosure and confidentiality agreements
with its employees and other persons who have access to its proprietary
technology. Despite these anticipated protections, other persons may
independently develop or obtain access to the Company's technology which would
adversely effect the Company's competitive position.
Through Intercapital Global, the Company has obtained an exclusive
worldwide license to market and sell OGS'Casino software to customers seeking to
establish their own online casinos. The Company is obligated to share with OGS a
portion of the purchase price and maintenance payments paid by these customers.
Substantially all of the Company's software technology is licensed from OGS and
the Company is dependent upon OGS to maintain the software and keep it up to
date. If any of the OGS Casino Software used or licensed by the Company were to
become obsolete or outdated, such development could have a material adverse
effect on the Company's business, revenues, operating results and financial
condition.
Government Regulation
General Regulatory Environment
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 American
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
Governments in the United States or other jurisdictions may in the
future adopt legislation that restricts or prohibits Internet gambling. After
previous similar bills failed to pass in 1998, in November 1999, the United
States Senate passed a bill which would prohibit and criminalize Internet
gambling (other than certain state regulated industries). A similar bill is
currently being
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considered by the House Judiciary Committee. There can be no assurance as to
whether the Senate bill or any similar bill will become law.
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 governmental authorities may view the Company as having
violated such statutes or laws, notwithstanding the 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 anti-gambling 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
expense, 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 the subject of government regulation. There is also the risk that current
laws, which pre-date or are incompatible with Internet electronic commerce, may
be enforced in a manner that restricts the electronic 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.
Gaming Licenses
Intercapital Global is the holder of the Company's gaming licenses and
the owner and operator of the Online Casino Web sites. Intercapital Global is
based in The Bahamas and, through a special purpose subsidiary, is in the
process of obtaining an Internet gaming license from the government of the
Dominican Republic. Upon receipt of the Dominican Republic gaming license,
Intercapital Global intends to relocate its facilities and game servers to the
Dominican Republic. Intercapital Global currently holds a gaming license from
the government of Honduras pursuant to which it conducts its present Internet
casino business.
Research and Development
In the last two years, the Company (and its predecessors prior to the
Merger, as defined
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below) expended approximately $2,000,000 on research and development activities
related to the Online Casinos, including market research and the purchase,
testing and evaluation of certain computer hardware and software, some of which
is no longer in use by the Company and has been written off. The Company intends
to continue its research efforts to develop additional Web sites, new games and
sporting events and new versions of existing games, as well as technological
enhancements such as shorter downloading time, improved sound and graphics and
broader software compatibility. In general, the Company plans to invest in new
technologies and casino style games and events that add to the entertainment
value of its product and appeal to one or more selected markets. There can be no
assurance, however, that the Company will have sufficient funds to carry out its
research and development plans.
Employees and Labor Relations
The Company and its subsidiaries currently have 15 total employees, of
which 10 are full time employees, none of whom are represented by labor unions.
The Company is not a party to any collective bargaining agreements or labor
union contracts, nor has it been subjected to any strikes or employment
disruptions in its history.
Business Development
The Company was incorporated on April 22, 1993 in the State of Indiana
under the name Kit Farms Inc. ("Kit"). From 1993 until 1995, Kit engaged in the
business of pet food manufacturing and processing. From 1995 until January 1998,
Kit was inactive. On January 28, 1998, Mint Energy Corporation, a Delaware
corporation ("Mint"), merged with and into Kit, with Kit being the surviving
corporation (the "Merger"). Concurrently, Intercapital Global was contributed to
Kit by its shareholders, and became a wholly-owned subsidiary of Kit. Mint and
Intercapital Global had the same beneficial owners (the "beneficial owners") at
the date of the Merger. After the Merger, Kit changed its name to the present
name of the Company and in September 1998, the Company commenced its present
Internet casino business.
The Merger was effected pursuant to the terms of a Merger Agreement
dated November 17, 1997 entered into between Mint and Kit, as amended by the
First Amendment thereto dated January 15, 1998, and as further amended by
certain oral agreements in February 1998 (as amended, the "Merger Agreement").
Pursuant to the Merger Agreement, the shareholders of Mint and Intercapital
Global received approximately 104.8 million shares of Common Stock (the "Merger
Shares") with a negotiated value of $2 million in consideration for entering
into the Merger. Through the Merger, the shareholders and management of Mint
acquired control over the Company as the surviving entity.
Prior to the Merger, Mint owned certain Internet casino hardware and
software through its two wholly-owned subsidiaries, Online Software, Inc., a
Delaware corporation ("OSI"), and Online Casinos, Inc. a Delaware corporation
("OCI"), and Intercapital Global owned a gaming license issued by the government
of Honduras. From 1996 through the date of the Merger, the
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beneficial owners of these entities advanced approximately $2 million which are
reflected as capital contributions to such entities to fund expenditures
relating to research and development of the online gaming business and software.
As a result of the Merger, OSI and OCI became wholly-owned subsidiaries of the
Company and were later merged with and into the Company with the Company
surviving.
Intercapital Global was organized in October 1993 as an offshore
private investment fund, and, from time to time, conducted certain investment
activities not related to the casino business on behalf of its beneficial
owners. The Merger Shares were issued to the beneficial owners of Mint and
Intercapital Global, in consideration for entering into the Merger; however, to
reduce the Company's public float, among other reasons, the beneficial owners
returned 57 million of the Merger Shares to the Company for cancellation. In
exchange for the returned shares, the Company issued to Intercapital Global, as
agent for the beneficial owners, options to acquire 57 million additional shares
of Common Stock at an exercise price of $0.1875 per share expiring on February
3, 2006 (the "Global Options"). The balance of 47.8 million Merger Shares was
subsequently distributed by Intercapital Global, as agent, to the beneficial
owners, which shares, together with the Global Options, were treated as
consideration for the Merger.
Pursuant to the Merger and concurrent contribution of its shares to
Kit, Intercapital Global became a wholly-owned subsidiary of the Company (and
operator of the Company's Online Casinos) and the Global Options were
transferred to Intercapital Asset Management Limited ("ICAM"), a Bahamian
corporation controlled by Sandy J. Masselli, Jr., the Chief Executive Officer of
the Company. ICAM holds the Global Options for the beneficial owners.
ITEM 2. DESCRIPTION OF PROPERTY
The corporate headquarters and principal executive office of the
Company is located at 1411 Peel Street, Suite 500, Montreal, Quebec, Canada H3A
1S5. This facility houses TE Canada's technical, marketing, customer support and
administrative operations. TE Canada leases approximately 3,057 square feet of
office space at these premises pursuant to a five year lease which commenced
August 1, 1999 and expires on July 31, 2004. The monthly rent is approximately
US$6.50 per square foot in years one and two, approximately US$7.10 per square
foot in year three and approximately $US7.50 per square foot in years four and
five. In addition to the rent, TE Canada is obligated to pay its proportionate
share of operating costs and taxes relating to the leased property.
Intercapital Global leases approximately 250 square feet of office
space at Devonshire House, Queen Street, Nassau, The Bahamas, pursuant to a ten
month lease expiring on May 31, 2000. The monthly rent is US$700. This facility
houses certain hardware and administrative systems and is the location of
Intercapital Global's game servers.
The Company believes that its leased properties are in good condition,
are well maintained and are adequate for the Company's current and immediately
foreseeable operating needs. Neither
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the Company nor its subsidiaries have any policies regarding investments in real
estate, securities, or other forms of property.
ITEM 3. LEGAL PROCEEDINGS
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, 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, 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 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 believes the
claims asserted in the State Court Action are subject to the mandatory
arbitration provisions in the Merger Agreement and, therefore, intends to seek
dismissal of the State Court Action on that basis. In any event, the Company
intends to vigorously defend itself and believes it has a number of valid
defenses to the Respondents' claims, whether such claims are asserted in the AAA
Action or the State Court Action.
On May 4, 1999, Intersphere Communications Ltd.("Intersphere"), a
former software vendor of the Company, brought an action against the Company in
the Superior Court of Montreal for alleged violations of the licensing
agreement between the Company and Intersphere and various alleged copyright
infringements. The case was recently settled out of court and all claims against
the Company have been dismissed in consideration for a payment by the Company to
Intersphere of $10,000 and the transfer of certain domain names to Intersphere.
In addition to the foregoing, the Company is involved from time to time
in various claims and lawsuits in the ordinary course of business, none of which
is expected, either singly, or in the aggregate, to have a material effect on
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders through
the solicitation of proxies or otherwise during the fourth quarter of the fiscal
year covered by this report.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information
The Company's Common Stock is currently traded on the OTC bulletin
board market maintained by Nasdaq under the symbol TTLN. The following table
sets forth the range of the high and low bid quotations for the Company's Common
Stock for the periods indicated (as reported by Nasdaq). The bid quotations set
forth below reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not represent actual transactions:
High Low
------ -----
Fiscal Year Ended December 31, 1998 . $0.47 $0.02
The bid information for 1998 is only available on an annual basis and not
for each quarter due to the lack of trading activity in the Company's (and its
predecessor's) Common Stock during that year.
High Low
------ -----
Fiscal Year Ended December 31, 1999
First Quarter...................................... $2.25 $0.47
Second Quarter..................................... 1.62 0.44
Third Quarter...................................... 0.68 0.35
Fourth Quarter..................................... 0.95 0.25
Security Holders and Dividends
As of March 27, 2000, there were approximately 115 holders of record of
the Company's Common Stock. The Company has not declared or paid any cash
dividends on its Common Stock during the past two fiscal years. The Company's
board of directors currently intends to retain all earnings for use in the
Company's business for the foreseeable future. Any future payment of dividends
will depend upon the Company's results of operations, financial condition, cash
requirements and other factors deemed relevant by the Company's board of
directors.
Recent Sales of Unregistered Securities
Pursuant to an agreement with Summerhill Gaming Limited ("SGL"), the
Company recently converted $518,083 in outstanding debt to SGL into 1,671,235
shares of Common Stock. The conversion is effective as of December 31, 1999 and
is based on the market price of $0.31 per share of the Company's Common Stock at
such date. Based on representations from SGL that it is an
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<PAGE>
accredited investor and a sophisticated investor, and on other factors such as
restricted stock legends and access by SGL to Company information, the issuance
of Common Stock to SGL 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.
ITEM 6. MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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-KSB. Except for the historical
information contained herein, the discussion in this Form 10-KSB 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-KSB 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-KSB.
Overview
From 1996 through August 1998, we were considered a development stage
company. Our primary activities were conducted through the OSI and OCI
subsidiaries of Mint., and consisted of the following:
. Developing our business model;
. Market research and analysis;
. Purchasing, testing and evaluating software, hardware and
other related technologies;
. Recruiting and training employees;
. Initial planning and development of our initial
Web site, known as www.theonlineCasino.com.
. Developing our information systems infrastructure; and
. Establishing finance and administrative functions.
On September 12, 1998, we launched the www.theonlinecasino.com Web site
and began
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<PAGE>
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 quarter of 2000, we focused our activites 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 techical support;
. Establishing an Information Provider Services Agreement
with CEI;
. Investigating other complementary product opportnities;
and
. Increasing traffic and awareness of our existing Online
Casinos.
We have incurred significant losses and negative cash flows from
operations in every fiscal period 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.
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
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Revenues. Net revenues in the year ended December 31, 1999 were
approximately $581,000, while in the year ended December 31, 1998, revenues were
approximately $170,000. We had no revenue prior to the launch of our Web site in
September 1998. 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. Revenues from the sportsbook operations were
approximately $189,000 and $84,000 for the years ended December 31, 1999 and
December 31, 1998, respectively. Substantially all of the 1999 sportsbook
revenues occurred in the first and fourth quarters of 1999 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. Revenues from the casino
operations were approximately $350,000 and $86,000 for the years ended December
31, 1999 and December 31, 1998, respectively. The volume of wagering was
significantly higher in the first quarter of 1999, due principally to the
seasonal effect of online activity, which typically increases in the winter
months. The increased volume typically causes the hold to increase. During the
summer months both the amount wagered and the hold decreased consistent with
lower internet usage as a whole and the conversion to new gaming software,
which caused our website to be unavailable during May 1999. The launch of the
three Asian oriented Web sites in June 1999 did not have a significant impact on
revenue during the year ended December 31, 1999. Other revenues, including
recognition of deferred income on slotsvegas.com, amounted to $ 42,000 in 1999.
The launch of the Slotvegas Web site in June 1999 did not have a significant
impact on revenue during the year ended December 31, 1999.
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. Cost incurred from
September 12, 1998 (the launch date of our first Online Casino) to December 31,
1998 were $165.000. For the year ended December 31, 1999 such cost amounted to
$369,000, reflecting a full year of activity and the addition of several Online
Casinos.
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 in the years ended
December 31, 1999 and 1998 were approximately $66,000 and $115,000,
respectively.
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
years ended December 31, 1999 and December 31,1998 were approximately $1,271,000
and $340,000, respectively. This increase was primarily the result of hiring
additional employees, and building brand awareness and professional fees.
Advertising costs amounted to $212,000 and $24,000 for the years ended
December 31, 1999 and December 31, 1998, respectively. The increase is a result
of aggressive promotional campaigns. Professional fees increased from $54,000 in
1998 to $188,000 in 1999 reflecting the cost of filing the Company's Form 10-SB
and litigation costs.
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Depreciation and Amortization. Depreciation and amortization expenses
consist primarily of the depreciation of furniture and in-house computer and
telecommunications equipment. Total depreciation and amortization expense was
approximately $64,000 and $6,000 for the years ended December 31, 1999 and
December 31, 1998, respectively. The increase reflects both higher volumes of
equipment owned and a full year of depreciation in 1999.
Income Taxes. We have incurred net losses for each period since
inception. Since we have not yet filed our 1996 through 1998 tax returns for
Mint and affiliates and Total Entertainment Inc., losses generated in prior
years may not be available. 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.
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 since inception, and
have a deficiency in working capital of approximately $878,000 and $260,000 for
the years ended December 31, 1999 and December 31, 1998, respectively. 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).
Net cash (used in) provided by operating activities was approximately
$(394,000) and $8,000 for the years ended December 31, 1999 and December 31,
1998, respectively. In May 1999, we entered an agreement with SGL for the sale
of a 50% interest in our Slotsvegas Web site. SGL paid $150,000 in cash to the
Company and $350,000 of obligations to vendors on behalf of the Company. The
total consideration of $500,000 was recorded as deferred income. SGL has also
loaned us $503,000 through December 31, 1999 in the form of an aggregate of
$198,000 of payments to vendors on behalf of the Company and $305,000 in cash
paid to the Company.
Pursuant to an agreement with SGL, the Company recently converted
$518,083 in outstanding debt to SGL (including all amounts owing under the
working capital loan agreement) into 1,671,235 shares of Common Stock. The
conversion is effective as of December 31, 1999 and is based on the quoted price
of $0.31 per share of the Company's Common Stock at such date.
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.
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<PAGE>
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.
ITEM 7. FINANCIAL STATEMENTS
Information with respect to this item is contained in the financial
statements appearing on Item 13 of this Report. Such information is incorporated
herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on
accounting and financial disclosure for the two most recent fiscal years.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Officers and Directors
The Company's officers and directors are as follows:
Name Age Position(s)
Sandy J. Masselli, Jr. 37 Chairman of the Board, Chief
Executive Officer and Secretary
Mitchell Brown 34 Director, President and Chief
Operating Officer
T. R. Anthony Malcom 65 Director
Robert D. Bonnell 54 Director
Gala Tse 41 Director
Richard B. Davis 53 Director
Terms of Directors
Mr. Masselli and Mr. Brown have served as directors of the Company
since January 21,
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<PAGE>
1998. Mr. Bonnell, Mr. Malcom, Ms. Tse and Mr. Davis have served as directors of
the Company since September 30, 1998. The directors of the Company serve as such
until the next annual meeting of stockholders and until their successors are
elected and qualified.
Business Experience of Directors and Executive Officers
Sandy J. Masselli, Jr. has served as the Chairman of the Board, Chief
Executive Officer, Secretary and a Director of the Company since January 1998.
From May 1990 to the present, Mr. Masselli has served as Managing Director of
Intercapital Asset Management Company, Inc., an investment advisory company,
where he has been responsible for the selection and monitoring of investments as
well as merchant banking activities. From May 1981 until May 1990, Mr. Masselli
worked as a Vice President or Senior Vice President at several major securities
and brokerage firms, including Prudential Securities, Inc, Drexel Burnham
Lambert, Inc., Shearson Lehman Hutton, Inc. and Merrill Lynch Pierce Fenner &
Smith, Inc. He holds a Bachelor of Arts degree in Political Science from
Monmouth College and a Juris Doctor from LaSalle University.
Mitchell Brown has served as the President, Chief Operating Officer and
a Director of the Company since January 1998. He has over 10 years experience in
the sales and marketing industry. From January 1990 to December 1997, Mr. Brown
worked as a sales representative at Feldman Associates where his
responsibilities included the sale of licensed and generic toys, candy, seasonal
and novelty products. Mr Brown holds a Bachelor of Science degree in Business
Administration from Monmouth University.
T. R. Anthony Malcolm has served as a Director of the Company since
September 30, 1998. He is a Barrister and Solicitor by profession since 1958. He
is admitted to the Bar in Quebec, Ontario and British Columbia, Canada. He was a
partner at the Canadian law firm of Foster, Leggat, Colby, Rioux & Malcolm from
1966 to 1969. In 1969, he became special counsel to the law firm of Chauvin &
Venne where he was responsible for arranging corporate acquisitions, mergers and
disposals throughout Canada, the United States and abroad for the North American
Trust Company. In 1971, Mr. Malcolm left Chauvin & Venne and entered the private
practice of law and maintains offices in Quebec and Ontario, Canada where he
continues to practice in such capacity. Mr. Malcolm has been appointed Deputy
Municipal Judge in Montreal West; legal advisor to and administrator for the
Quebec Rental Board; and President of the Provincial Arbitration Commission for
the Town of Mount Royal.
Robert D. Bonnell has served as a Director of the Company since
September 30, 1998. He has over 24 years experience in the marketing and public
relations industries. From 1992 to the present, Mr. Bonnell has served as
Chairman and Chief Executive Officer of Skiff Lake Holdings Limited, a private
holding company with positions in real estate, investments and trusts. During
this period, he also served as Chairman of Communicer, an international company
specializing in corporate communications and advice in connection with mergers
and acquisitions. Previously, Mr. Bonnell worked as Managing Director and in
other senior positions for Public & Industrial Relations, Canada's largest
public relations firm. In addition, Mr. Bonnell has in the past served as
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a director of several other companies, including Windsor Investments S.A. in
Luxemburg, Tudor Deutche International and Windsor Energy Corporation in Tulsa,
Oklahoma (which position he currently holds). He holds a Bachelor of Arts
(Honors) degree in Political Science and Economics from Ricker College,
University of New Brunswick.
Gala Tse has served as a Director of the Company since September 30,
1998. She has extensive experience in marketing and distributing products in
Asia. From 1995 to 1997, she was the Director of Business Development for Hasbro
Toys Asia. From 1991 to 1995, Ms. Tse worked as an independent distributor or
"Blue Diamond Executive" based in Hong Kong for NuSkin International, a
multilevel marketing company. From 1990 to 1991, she was a Director of Royal
Company Ltd., a Japanese toy company, responsible for setting up their Hong Kong
office for the purpose of manufacturing toys in China for export throughout
South East Asia. Since 1997, Ms. Tse has been raising a family. She holds a
Bachelor of Science degree from McGill University in Montreal.
Richard B. Davis has served as a Director of the Company since
September 30, 1998. He is a Certified Public Accountant licensed to practice in
New York and New Jersey. From 1976 to the present, Mr. Davis has been engaged in
the private practice of accounting, providing services to many companies and
individuals. Prior to that time, Mr. Davis spent many years working in the tax
and other departments at several major accounting firms, including Peat Marwick,
Mitchell & Co. and Touche Ross & Co. Mr. Davis is a member of the American
Institute of Certified Public Accountants, the New York State Society of
Certified Public Accountants and the New Jersey Society of Certified Public
Accountants. He holds a Bachelor of Business Administration degree from City
College of New York.
Significant Employees
Vance P. Hein has been a Vice President of the Company since April 1,
1999 with responsibility for network administration. Mr. Hein has extensive
experience with computer network administration and information and security
systems management. From 1997 to 1998, Mr. Hein worked as Network Administrator
for Intersphere Communications Ltd., a gaming software developer located in
Plymouth Meeting, Pennsylvania, where he was responsible for the company's
network, Web server and security system for user accounts. From 1992 to 1997,
Mr. Hein was employed as Information Systems Manager by CVP Communications in
West Chester, Pennsylvania where he was responsible for all computer operations,
desktop support and software installation. In addition, from 1976 to 1984, Mr
Hein served in the U.S. Navy where he had responsibilities in the broadcast
network and shipboard communication areas. Mr Hein has his MCSE Certification
and holds an MFA degree in Film & Television Production/Information Technology
from the University of Southern California, Los Angeles, as well as a B.S.
degree in Secondary Education from Clarion University.
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Family Relationships
There are no family relationships among directors, executive officers
or other persons nominated or chosen by the Company to become officers or
executive officers.
Involvement in Certain Legal Proceedings
The Company is not aware of any material legal proceedings that have
occurred within the past five years concerning any director, director nominee,
promoter or control person which involved a criminal conviction, a pending
criminal proceeding, a pending or concluded administrative or civil proceeding
limiting one's participation in the securities or banking industries, or a
finding of securities or commodities law violations.
Section 16(a) Beneficial Ownership Reporting Compliance.
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the "SEC"). Officers, directors and greater than ten percent shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
Based solely on the Company's review of the copies of such forms
received by it, or written representations from certain reporting persons, the
Company believes that, during the fiscal year ended December 31, 1999, all
filing requirements applicable to the Company's officers, directors and greater
than ten percent beneficial owners were complied with.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning
the aggregate compensation paid to the Company's Chief Executive Officer. There
were no other executive officers of the Company who earned in excess of $100,000
for the year ended December 31, 1999:
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards Payouts
Securities
Underlying All Other
Name and Principal Position(s) Year Salary ($) Bonus ($) Other ($) Options Compensation
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sandy J. Masselli, Jr./1/ 1999 100,0002/2/ 0 0 0 0
Chairman of the Board 1998 100,0002/2/ 0 0 63,250,0003/3/ 0
and Chief Executive Officer
</TABLE>
1. Mr. Masselli became Chief Executive Officer of the Company as of January
23, 1998 as part of the Merger.
2. See Deferred Compensation Arrangements below.
3. This amount consists of (i) 3,000,000 common stock options issued to Mr.
Masselli, (ii) 2,500,000 common stock options issued to Mr. Masselli's brother,
Joseph H. Masselli, with respect to which Mr. Masselli is in a position to
exercise voting and investment power, (iii) 750,000 common stock options issued
to Mr. Masselli's brother, John J. Masselli, with respect to which Mr. Masselli
is in a position to exercise voting and investment power, and (iv) 57,000,000
common stock options (the "ICAM Options") held by Intercapital Asset Management
Limited, a Bahamian corporation ("ICAM"), with respect to which Mr. Masselli is
in a position to exercise voting and investment power. All of the 63,250,000
common stock options referred to in clauses (i), (ii) (iii) and (iv) above are
exercisable at any time at $0.1875 per share and expire on February 3, 2006. The
exercise price was equal to the fair market value of the Company's Common Stock
at the time of issuance of the options.
Stock Options
No stock options were granted or exercised during 1999 to or by any of
the Company's named executive officers.
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Long-Term Incentive Plans
The Company made no awards to the named executive officers under any
long-term incentive plan in 1999.
Compensation of Directors
Directors of the Company do not receive any stated salary or other
compensation for their services as directors or members of committees of the
board of directors, but by resolution of the board, a fixed fee and expenses of
attendance may be allowed for attendance at each meeting. Directors of the
Company may also serve the Company in other capacities as an officer, agent or
otherwise, and may receive compensation for their services in such other
capacity.
Deferred Compensation Arrangements
Mr. Masselli, together with certain other senior officers of the
Company, have agreed to defer their annual salaries until such time as
determined by the relevant officer, without interest and not funded. The
deferred salaries shall be paid to such persons in cash or stock of the Company
at such future time as each person may elect by written notice to the Company.
The total amount of deferred officer salaries for 1999 and 1998 was
approximately $540,000 and $200,000, respectively.
Employment Agreements
The Company is not a party to any employment or consulting agreement
with any named executive officer.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following tables set forth certain information regarding beneficial
ownership of the Company's Common Stock by (i) each person who is known by the
Company to beneficially own more than five percent of the Company's Common
Stock, (ii) each of the Company's directors, (iii) each of the executive
officers named in the Summary Compensation Table set forth in Item 10 --
"EXECUTIVE COMPENSATION", and (iv) all directors and executive officers of the
Company as a group. Unless otherwise indicated, the address of such persons is
1411 Peel Street, Suite 500, Montreal, Quebec, Canada H3A 1S5.
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Number of Shares
of Common Stock
Name and Address of Beneficial Owner Beneficially Owned/1/ Percent of Class/2/
- ----------------------------------- --------------------- -------------------
Sandy J. Masselli, Jr. 73,250,000/3/ 60.7
Mitchell Brown 3,500,000/4/ 5.8
Robert D. Bonnell 2,350,000/5/ 4.0
T. R. Anthony Malcom 250,000/6/ .4
Gala Tse 250,000/7/ .4
Richard B. Davis 250,000/8/ .4
Robert and Carole Knoblock 4,140,000 7.2
294 South 200 W
Valparaiso, Indiana 46383
Intercapital Asset Management Limited 57,000,000/9/ 49.8
c/o The Royal Bank of Scotland
Shirley & Charlotte Street
Nassau, The Bahamas
All directors and executive officers 79,500,000 71.7
as a group (first 6 persons)
1. Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Except as indicated by footnotes and subject
to community property laws, where applicable, the persons named above have sole
voting and investment power with respect to all shares of Common Stock shown as
beneficially owned by them.
2. With respect to optionholders, the calculation of percentage ownership
assumes the exercise of the relevant option or options beneficially owned by the
holder but not by other optionholders.
3. This amount consists of (i) 10,000,000 shares of Common Stock held,
directly or indirectly, by Mr. Masselli's family and relatives, with respect to
which Mr. Masselli is in a position to exercise voting and investment power,
(ii) 3,000,000 common stock options issued to Mr. Masselli, (iii) 2,500,000
common stock options issued to Mr. Masselli's brother, Joseph H. Masselli, with
respect to which Mr. Masselli is in a position to exercise voting and investment
power, (iv) 750,000 common stock options issued to Mr. Masselli's brother, John
J. Masselli, with respect to which Mr. Masselli is in a position to exercise
voting and investment power and (v) 57,000,000 common stock options (the "Global
Options") held by Intercapital Asset Management Limited, a Bahamian corporation
("ICAM") as transferee from Intercapital Global, with respect to which Mr.
Masselli is in a position to exercise voting and investment power. All of the
63,250,000 common stock options referred to in clauses (ii), (iii), (iv) and (v)
above are exercisable at any time at $0.1875 per share and expire on February 3,
2006. ICAM is also listed in the table as an additional beneficial owner of the
ICAM Options.
4. 2,500,000 of this amount consists of common stock options issued to Mr.
Brown. The options are exercisable at any time at $0.1875 per share and expire
on February 3, 2006.
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5. 2,000,000 of this amount consists of common stock options issued to Mr.
Bonnell. The options are exercisable at any time at $0.15 per share and expire
on September 30, 2006. Of the remaining 350,000 shares beneficially owned by Mr.
Bonnell, 170,000 are held directly and 180,000 are held through a family holding
company of which Mr. Bonnell is the Chairman and CEO.
6. This amount consists of 250,000 common stock options issued to Mr.
Malcom. The options are exercisable at any time at $0.15 per share and expire on
September 30, 2006.
7. This amount consists of 250,000 common stock options issued to Ms. Tse.
The options are exercisable at any time at $0.15 per share and expire on
September 30, 2006.
8. This amount consists of 250,000 common stock options issued to Mr. Davis.
The options are exercisable at any time at $0.15 per share and expire on
September 30, 2006.
9. This amount consists of the 57,000,000 Global Options issued to
Intercapital Global as an agent for the beneficial owners of Mint and
Intercapital Global. The Global Options were subsequently transferred by
Intercapital Global to ICAM. The Global Options are exercisable at any time at
$0.1875 per share and expire on February 3, 2006. Sandy J. Masselli, Jr. is also
listed in the table as an additional beneficial owner of the Global Options.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Intercapital Global Transactions
Prior to the January 1998 Merger between Kit and Mint in which the
Company was the surviving entity, Sandy J. Masselli, Jr., Chief Executive
Officer of the Company, had voting and investment control over all of
Intercapital Global's assets and outstanding shares of capital stock. Concurrent
with the Merger, Intercapital Global was contributed to the Company. At the time
of the Merger, the beneficial owners of Mint and Intercapital Global were
identical. Pursuant to the Merger Agreement, Intercapital Global, in its role as
agent for the beneficial owners, received certain shares of Common Stock and
options which it subsequently distributed to or for the benefit of the
beneficial owners. See PART I--ITEM 1-- "DESCRIPTION OF BUSINESS--Business
Development".
Personal Guaranty of MPACT Agreement
Intercapital Global has entered into an Agreement dated August 18, 1998
(the "Processing Agreement") with MPACT Immedia Transaction Services Ltd., a
Bermuda company ("MPACT"), pursuant to which MPACT performs various credit card
approval and processing services to facilitate Online Casino transactions in
return for a weekly fee equal to 5.75% of all approved and settled credit card
transactions, subject to a minimum fee of $2,000 per month. The Processing
Agreement is terminable by Intercapital Global, with or without cause, on 15
days notice to MPACT. Intercapital Global's obligations to IMPACT under the
Agreement are personally guaranteed by Sandy J. Masselli, Jr., the Chief
Executive Officer of the Company.
Other
25
<PAGE>
From time to time, certain officers and directors of the Company have
directly paid certain Company expenses. Such transactions have been recorded in
the Company's books as due to officers, and do not bear interest. There are no
scheduled terms of repayment of such amounts.
From 1996 to 1998, Mint and its subsidiaries (predecessor of the
Company) had expenses, principally for computer programming services, that
included approximately $65,000 paid to entities controlled by certain officers
of the Company. During this period, Mint also received advances which are
reflected as capital contributions in the amount of approximately $2,000,000
from the beneficial owners. See PART I--ITEM 1--"DESCRIPTION OF
BUSINESS--Business Development."
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) Financial Statements
- Report of Independent Accountants
- Consolidated Balance Sheets
- Consolidated Statement of Operations
- Consolidated Statement of Stockholders' Equity (Defiency)
- Consolidated Statement of Cash Flows
- Notes to Consolidated Financial Statements
(b) 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.*
26
<PAGE>
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.
(c) No reports on Form 8-K were filed during the last quarter of the period
covered by this Report.
27
<PAGE>
I N D E X
Page
----
Report of Independent Certified Public Accountants F-2
Financial Statements
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statement of Stockholders' Equity (Deficiency) F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7 - F-24
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Stockholders and Board of Directors
Total Entertainment Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Total
Entertainment Inc. (an Indiana corporation) and Subsidiaries as of December 31,
1999 and 1998, and the related consolidated statements of operations, cash flows
and stockholders' equity (deficiency) for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material 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 estimates
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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Total
Entertainment Inc. and Subsidiaries as of December 31, 1999 and 1998, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended in conformity with accounting principles generally accepted
in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company incurred a net loss of $1,191,000 during the year ended December 31,
1999, and, as of that date, the Company's current liabilities exceeded its
current assets by $878,000 and its total liabilities exceeded its total assets
by $780,000. There are also significant legislative risks and uncertainties
regarding on-line casino operations. In addition, the Company is involved in
litigation as described in Note D-4. Although the Company's management believes
it has meritorious defenses, there can be no assurance that the Company will
prevail. If the Company does not prevail, it may have a material adverse impact
on the financial condition of the Company. These factors, among others, as
discussed in Note A-3 to the financial statements, raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note A-3. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Grant Thornton LLP
GRANT THORNTON LLP
Edison, New Jersey
March 15, 2000
F-2
<PAGE>
Total Entertainment Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December December
31, 1998 31, 1999
----------- -----------
ASSETS
Current assets
Cash $ 30,390 $ 23,865
Accounts receivable - MPACT 54,802 73,289
Prepaid expense and other 16,241 -
----------- -----------
Total current assets 101,433 97,154
Property and equipment
Computer equipment 83,019 302,862
Furniture and fixtures - 30,683
----------- -----------
83,019 333,545
Less accumulated depreciation 6,226 70,150
----------- -----------
76,793 263,395
Deferred licensing fees 50,708 308,037
Other assets 25,001 28,657
----------- -----------
$ 253,935 $ 697,243
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities
Accounts payable and accrued liabilities $ 83,892 $ 163,271
Customer account deposits 51,860 201,457
Current maturities of capital lease obligations - 24,838
Deferred compensation 200,000 540,000
Due to directors and stockholders 25,760 45,566
----------- -----------
Total current liabilities 361,512 975,132
Capital lease obligations, less current maturities - 37,639
Deferred income - 464,682
COMMITMENTS AND CONTINGENCIES
Stockholders' equity (deficiency)
Common stock, $.001 par value; authorized,
200,000,000 shares; issued and
outstanding, 55,717,208 shares at December 31,
1998 and 57,388,443 shares at December 31, 1999 55,717 57,388
Additional paid-in capital 1,944,283 2,460,695
Accumulated deficit (2,107,577) (3,298,293)
----------- -----------
(107,577) (780,210)
----------- -----------
$ 253,935 $ 697,243
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
Total Entertainment Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
1998 1999
----------- -----------
Gaming revenues, net $ 169,993 $ 581,543
----------- -----------
Costs and expenses
Cost of operations 165,208 369,112
Research and development 114,600 66,395
Selling, general and administrative 340,545 1,271,222
Merger expenses 145,000 -
Depreciation and amortization 6,226 63,924
----------- -----------
771,579 1,770,653
----------- -----------
Loss before provision for
income taxes (601,586) (1,189,110)
Provision for income taxes 3,900 1,606
----------- -----------
NET LOSS $ (605,486) $(1,190,716)
=========== ===========
Basic and diluted loss per common share $(.01) $(.02)
=========== ===========
Weighted-average shares outstanding
used in computing basic and diluted
loss per common share 60,566,954 55,721,775
=========== ===========
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
Total Entertainment Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
Years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
Common stock
$.001 par value Additional Total
------------------------ paid-in Accumulated stockholders'
Shares Amount capital deficit equity (deficiency)
----------- --------- ---------- ----------- -------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 $(1,502,091) $(1,502,091)
Net loss for the year (605,486) (605,486)
Recapitalization of no par common stock of Mint
Energy into $.001 par value common stock of Kit
Farms Inc. 112,717,208 $112,717 $1,887,283 2,000,000
Cancellation of shares exchanged for options (57,000,000) (57,000) 57,000 -
----------- -------- ---------- ----------- -----------
Balance, December 31, 1998 55,717,208 55,717 1,944,283 (2,107,577) (107,577)
Conversion of SGL advances and other amounts
due to common stock 1,671,235 1,671 516,412 518,083
Net loss for the year ended December 31, 1999 (1,190,716) (1,190,716)
----------- -------- ---------- ----------- -----------
Balance, December 31, 1999 57,388,443 $ 57,388 $2,460,695 $(3,298,293) $ (780,210)
=========== ======== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-5
<PAGE>
Total Entertainment Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
<TABLE>
<CAPTION>
1998 1999
----------- ----------
<S> <C> <C>
Cash flows from operating activities
Net loss $(605,486) $(1,190,716)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
Amortization of deferrred licensing fees 70,992 94,714
Depreciation and amortization 6,226 63,924
Merger expense 145,000 --
Expenditures paid by directors, stockholders
and others 172,876 69,456
Deferred income recognized - (35,318)
Deferred compensation 200,000 340,000
Interest accrued on loans from and net profit
allocated to SGL (Note G) 15,125
Increase (decrease) in cash from changes in
operating assets and liabilities
Accounts receivable (54,802) (18,487)
Prepaid expense and other (16,241) 43,741
Deferred licensing fees (21,700) (2,041)
Other assets (25,000) (3,656)
Accounts payable and accrued liabilities 135,752 79,379
Customer account deposits - 149,597
--------- --------
Net cash provided by (used in)
operating activities 7,617 (394,282)
--------- --------
Cash flows from investing activities
Purchase of property and equipment (2,987) (77,323)
Cash proceeds from transfer of 50%
interest in Slolsvegas - 150,000
--------- --------
Net cash (used in) provided by
investing activities (2,987) 72,677
--------- --------
Cash flows from financing activities
Principal payments capital leases - (9,726)
Increase in due to directors and stockholders 25,760 19,806
Proceeds from SGL working capital loan 305,000
--------- --------
Net cash provided by financing activities 25,760 315,080
--------- --------
NET INCREASE (DECREASE)
IN CASH 30,390 (6,525)
Cash at beginning of period - 30,390
--------- --------
Cash at end of period $ 30,390 $ 23,865
========= ===========
</TABLE>
See Note G for supplementary cash flow information.
- ---------------------------------------------------
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
Total Entertainment Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1999
NOTE A - BUSINESS, DESCRIPTION AND HISTORY OF COMPANY
1. Business
Total Entertainment Inc., formerly known as Kit Farms Inc. (the "Company"),
incorporated in the state of Indiana, has three wholly-owned subsidiaries,
Intercapital Global Fund Ltd. ("Intercapital Global"), an Antiguan company,
Intercapital Canada Ltd. ("Intercapital Canada"), incorporated in the
Province of Quebec, and Total Entertainment (Delaware) Inc., an inactive
Delaware company.
The Company offers software-based games of chance and sports wagering
facilities on a worldwide basis through the Internet located at
www.theonlinecasino.com, www.slotsvegas.com, www.bingoonthenet.com, as well
----------------------- ------------------ ---------------------
as other sites.
Intercapital Global, the operating company, owns a gaming license issued by
the Government of Honduras and the Dominican Republic (pending), and
several Internet web sites. It utilizes software for the gaming and
sportsbook operations under licenses from Atlantic Entertainment
International Inc. ("Atlantic"), an independent software developer.
Intercapital Global accepts wagers via the Internet through an E-commerce
credit card processing agreement with MPACT Immedia Transaction Services
Ltd. ("MPACT").
Intercapital Canada provides Intercapital Global with technical and
customer support and administrative services.
From the incorporation date of Mint Energy Corporation, a Delaware
corporation, and its subsidiaries ("Mint Energy"), September 17, 1996
through August 31, 1998, the Company was in the development stage. The
Company launched its www.theonlinecasino.com web site on September 12,
-----------------------
1998. There are significant legislative risks and uncertainties regarding
on-line gaming operations (see Note D). The Company is developing plans to
enter other internet-related business opportunities, such as e-tailing and
advertising arrangements, and during 2000 entered into the following
transactions:
Software Licensing Business
The Company has recently began to market and sell casino gaming software,
server hosting and related support services on a turnkey basis to customers
who wish to establish and operate their own internet casino.
Pursuant to a Marketing and Licensing Agreement with OGS (formerly known as
Atlantic) 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 websites. In consideration for this license, Intercapital
Global will pay
F-7
<PAGE>
Total Entertainment Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1998 and 1999
NOTE A (continued)
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 common stock to OGS in
instalments over the five-year term of the agreement. Either party may
terminate the agreement upon 30 days' written notice to the other.
In order to implement the OGS Agreement, Intercapital Global has entered
into an Information Provider Services Agreement (the Dominican Hosting
Agreement") dated February 1, 2000 with Caribbean Entertainment
International, S.A. ("CEI"). Pursuant to the Dominican Hosting Agreement,
CEI has agreed to install 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 others on a turnkey basis, whether supplied by OGS or
another software vendor, CEI has also 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. The
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 license directly from the government.
In consideration for CEI's 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. Intercapital Global intends to
charge fees to its licensees for the casino gaming software, hosting
services, customer service and administrative support, the provision of a
gaming license from the government of the Dominican Republic , as well as
royalties on net winnings. The term of the Dominican Hosting Agreement is
five years.
F-8
<PAGE>
Total Entertainment Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1998 and 1999
NOTE A (continued)
Slotsvegas Transactions
In June 1999, the Company launched an Online Casino geared toward slots
players located at www.slotsvegas.com ("Slotsvegas"). On May 5, 1999, the
------------------
Company entered into an agreement with Summerhill Gaming Limited ("SGL")
to transfer a 50% interest in the Company's www.slotsvegas.com website.
------------------
The agreement does not specify a fixed period and remains in effect as long
as the site is in operation, which has been estimated by management to be
four years. In consideration for this interest, SGL paid $150,000 in cash
to the Company and paid $350,000 of obligations to vendors on behalf of the
Company, which was recorded as deferred income (see Note B-15). Such
amounts are non-refundable.
The agreement requires the Company to pay SGL 50% of the net profits
derived from the Slotsvegas site, on a monthly or other interim basis, as
agreed to by the Company and SGL. To the extent that the slotsvegas site
incurs net losses, SGL will pay the Company 50% of such amounts. Through
December 31, 1999, the net profits from the Slotsvegas site was
insignificant.
As part of the agreement, SGL agreed to make short-term loans up to
$500,000 to the Company for liquidity purposes. The loans bear interest at
7% per annum, require interest payments on a monthly basis, and payment of
the entire principal balance three years from the date of issuance. Through
December 31, 1999, SGL loaned the Company approximately $502,958. The loans
were made in the form of direct payments of obligations to vendors on
behalf of the Company and cash advances of $305,000. On December 31, 1999,
the Company converted the cumulative cash advances of $502,958, accrued
interest of $12,867 and net profits from Slotsvegas of $2,258 into
1,671,235 shares of common stock of the Company using the quoted value of
the common stock of $.31 per share.
In March 2000, pursuant to a Purchase Agreement dated March 1, 2000 between
Intercapital Global and Netforfun.com, Inc., a publicly held Canadian
company ("Netforfun"), the Company sold (subject to ratification by the
Netforfun shareholders at a special shareholders meeting scheduled for May
23, 2000) its remaining 50% interest in the Slotsvegas site and related
assets and customer deposits to Netforfun for $2,000,000, payable as
follows:
. $100,000 in cash upon signing of the purchase agreement;
F-9
<PAGE>
Total Entertainment Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1998 and 1999
NOTE A (continued)
. $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 or before July 1, 2000; and
. $1,500,000 in the form of 15,000,000 shares of Netforfun common stock
valued at $0.10 per share.
Intercapital Global has also entered into a Maintenance and Support
Services Agreement with Netforfun pursuant to which Intercapital Global has
agreed to provide certain maintenance and support services to Netforfun for
the Slotsvegas software for an initial term of one year for a fee of
$15,000 per month, subject to adjustment.
2. History
Kit Farms was incorporated on April 22, 1993 and was engaged in the pet
food business until 1995, when the remaining assets and liabilities were
liquidated. From that date to January 28, 1998, Kit Farms was an inactive
public company trading on the Nasdaq over-the-counter bulletin board market
("bulletin boards").
F-10
<PAGE>
Total Entertainment Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1998 and 1999
NOTE A (continued)
From 1996 through 1998, Mint Energy had spent several years exploring the
possibilities of and developing software for a gaming and wagering
operation accessible through the Internet. Mint Energy had two
subsidiaries, Online Casino Inc. and Online Software Inc. These entities
had developed a methodology for on-line gaming and investigated developing
certain software gaming products, from 1996 through the date of merger.
These entities had no revenues or employees during this period. Funds used
by Mint Energy and subsidiaries to conduct these activities and develop the
business were received as advances which are reflected as capital
contributions from Sandy J. Masselli, Jr., Chairman of the Board ("Mr.
Masselli") and other shareholders of Mint Energy. At the time of the
merger, the shareholders of Mint and Intercapital Global were identical
(the "Beneficial Owners") (see Notes C-1 and E-2).
On January 28, 1998 and as amended, Kit Farms Inc. ("Kit Farms") merged
with Mint Energy including its subsidiaries, and the Beneficial Owners of
Intercapital Global contributed their shares of Intercapital Global to Kit
Farms. The Beneficial Owners received approximately 104.8 million shares
of Kit Farms, which were valued by the parties to the transaction at
approximately $2 million (based upon a negotiated market value of the
thinly traded shares of Kit Farms on the "bulletin boards" of approximately
$.02 per share). The previously existing shareholders of Kit Farms retained
approximately 7.4 million of the outstanding shares, and the principals of
Kit Farms received an additional 537,208 shares as consideration to
complete the transaction (see Note C). The acquisition resulted in the
owners and management of Mint Energy having effective control of the
combined entity.
Kit Farms changed its name to Total Entertainment Inc. on February 19,
1998.
Under generally accepted accounting principles, the acquisition is
considered to be a capital transaction in substance, rather than a business
combination. That is, the acquisition is equivalent to the issuance of
stock by Mint Energy for the net monetary assets of Kit Farms, accompanied
by a recapitalization, and is accounted for as a change in capital
structure. Accordingly, the accounting for the acquisition is identical to
that resulting from a reverse acquisition, except that no goodwill is
recorded. Under reverse takeover accounting, the post-reverse-acquisition
comparative historical financial statements of the "legal acquirer" (Kit
Farms) are those of the "accounting acquirer" (Mint Energy).
F-11
<PAGE>
Total Entertainment Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1998 and 1999
NOTE A (continued)
Earnings per share ("EPS") are calculated to reflect the Company's change
in capital structure for all periods presented. The basic structure and
terms of the acquisition and related events, all of which are deemed to
have occurred simultaneously on January 28, 1998, together with the
applicable accounting effects, were as follows:
. Kit Farms acquired all of the outstanding shares of common shares of
Mint Energy, including its subsidiaries, and the Beneficial Owners of
Intercapital Global contributed their shares of Intercapital Global to
Kit Farms in exchange for 104.8 million shares of Kit Farms.
Intercapital Global became a wholly- owned subsidiary of Kit Farms.
The common stock exchanged, in addition to the existing Kit Farms
shares outstanding, collectively resulted in the recapitalization of
the Company.
. The officers and directors of Kit Farms resigned and were replaced by
Mint Energy representatives.
. The Beneficial Owners of Mint Energy returned 57 million shares to the
Company in exchange for options to acquire 57 million shares of the
Company's common stock at $.1875 per share (the "Global options").
Intercapital Global transferred the Global option to Intercapital
Asset Management Limited. The remaining 47.8 million shares of Kit
Farms and the Global options were distributed to the Beneficial
Owners.
. Costs associated with the transaction were expensed.
. Kit Farms changed its name to Total Entertainment, Inc.
Intercapital Global was organized in 1993 by Mr. Maselli, as an offshore
private investment fund, which from time to time conducted certain
investment activities not related to the online gaming business for the
benefit of the Beneficial Owners. At the time, Mr. Maselli had voting and
investment control over all of Intercapital Global's assets and control
over all outstanding shares of capital stock issued by Intercapital Global.
Intercapital Global later became a wholly-owned subsidiary of the Company
when its Beneficial Owners contributed their shares to Kit Farms as part of
the merger. At the time of the transfer of ownership, Intercapital Global
held no assets or liabilities other than the gaming license.
F-12
<PAGE>
Total Entertainment Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1998 and 1999
NOTE A (continued)
3. Basis of Presentation
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of
the Company as a going concern. The Company has incurred a loss since
inception. At December 31, 1998 and 1999, the Company has a working capital
deficiency of approximately $260,000 and $878,000, respectively, and a
stockholders' deficiency of approximately $108,000 and $780,000,
respectively. The Company is also involved in litigation (as described in
Note D-4) which, if the Company is unsuccessful in its defense, could have
a material adverse effect on the Company. There are also significant
legislative risks and uncertainties regarding on-line casino operations.
In view of the matters described in the previous paragraph, recoverability
of a major portion of the recorded asset amounts shown in the accompanying
balance sheet is dependent upon continued operations of the Company, which,
in turn, are dependent upon the Company's ability to meet its financing
requirements on a continuous basis and to succeed in its future operations.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or amounts of
liabilities that might be necessary should the Company be unable to
continue in existence.
The Company's plans with respect to this situation include the following:
a. In January 2000, the Company sold the remaining 50% of its interest in
the www.slotsvegas.com website receiving cash proceeds of $150,000 plus
other consideration (see Note A-1 - Slotsvegas Transactions).
b. In 2000, the Company broadened its product offerings through its Master
License arrangement with OGS and its hosting service with Caribbean
(see Note A-1 - Software Licensing Business). These products are
expected to generate revenues in the Spring of 2000.
c. Obtain advances from affiliated companies, officers or other sources, as
necessary, to fund operating expenses.
d. Defer officers' salaries until such time the Board of Directors
determines it is appropriate to commence payment. (See Note E-1.)
e. In December 1999, cumulative advances from SGL (see Note A-1) plus
accrued interest were converted into equity of the Company.
Major expenditures made in the first three quarters of 1999 for software
licenses, hardware, marketing, web design and new website launch were made
from advances from affiliates and SGL. During the first half of 2000,
management does not expect to have any significant nonrecurring
expenditures or significant capital expenditures, and plans to have
adequate liquidity from operations including the football and college
basketball wagering season (the Company's most profitable product
offering).
F-13
<PAGE>
Total Entertainment Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1998 and 1999
NOTE B - ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying consolidated financial statements follows:
1. Principles of Consolidation
These consolidated financial statements include the accounts of the Company
and its subsidiaries and reflect the operations of Mint Energy and
affiliates from their inception. All significant intercompany accounts and
transactions have been eliminated.
2. Fixed Assets
Computers and furniture and fixtures are stated at cost and are depreciated
over their estimated useful lives of three to five years.
3. Foreign Currency Translation
The assets and liabilities of the Company's foreign operations are
translated at the exchange rates prevailing at year-end and income and
expenses are translated at the average exchange rate for the year. Balance
sheet gains and losses arising from translation are immaterial. Translation
gains or losses, for the periods presented, have been included in the
results of operations and are not material.
F-14
<PAGE>
Total Entertainment Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1998 and 1999
NOTE B (continued)
4. Earnings (Loss) Per Share
Basic loss per share is computed by dividing the loss for the period by the
weighted average number of common shares outstanding during the period.
Diluted loss per share is computed by dividing the loss for the period by
the weighted average number of common shares adjusted for the dilutive
effect of any potential common shares issuable during the period. Since the
Company had losses during the periods presented, stock options outstanding
are not included in the diluted loss per share calculation, as the effect
would be antidilutive. The amount of options not considered in the loss per
share calculation because their effect was antidilutive was 69,250,000 for
the years ended December 31, 1998 and 1999.
5. Income Taxes
Total Entertainment is responsible for filing a United States Federal
income tax return, while Intercapital Canada is responsible for filing a
Canadian tax return. Intercapital Global is not required to file a United
States corporate income tax return because it is a foreign corporation and
has no U.S. source income or U.S. operations. Intercapital Global is not
required to file an Antiguan tax return since it is an International
Business Corporation. (See Note D-7.)
Financial Accounting Standards Board Statement of Financial Accounting
Standards No. 109 ("SFAS No. 109"), "Accounting for Income Taxes," requires
the liability approach to accounting for deferred income taxes for
financial reporting purposes. Under the provisions of SFAS No. 109,
deferred tax assets and liabilities are determined based on tax rates
expected to be in effect when the taxes are actually paid or refunds
received.
6. Concentration of Credit or Market Risk
Statement of Financial Accounting Standards No. 105 ("SFAS No. 105")
requires the disclosure of significant concentration of credit or market
risk, regardless of the degree of such risk. Financial instruments, as
defined by SFAS No. 105, which potentially subject the Company and its
subsidiaries to concentrations of risk, consist principally of cash and
accounts receivable.
7. Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-15
<PAGE>
Total Entertainment Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1998 and 1999
NOTE B (continued)
8. Valuation of Long-Lived Assets
The Company has adopted Statement of Financial Accounting Standards No. 121
("SFAS No. 121"), "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed of." The statement requires that the
Company recognize and measure impairment losses of long-lived assets and
certain identifiable intangibles and value long-lived assets to be disposed
of.
9. Development and Operating
Costs associated with research and development, principally relating to
website development and
e-commerce development are expensed as incurred. Such costs also include
expenditures for developing a methodology for on-line gaming and
investigating the development of certain software gaming products.
10. Advertising
Costs associated with advertising are expensed as incurred, and amounted to
$24,000 and $212,000 for the years ended December 31, 1998 and 1999,
respectively.
11. Segment and Related Information
The Company operates as one segment, internet-based gaming, and follows the
requirements of SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information." The total assets of the Company held in Canada
and Antigua at December 31, 1999 are $266,000 and $431,000, and at
December 31, 1998 were $17,000 and $150,000, respectively.
Customers who log on to the Company's websites are located in countries
throughout the world. It is impractical for the Company to determine the
revenues generated from any one geographic location.
12. Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
F-16
<PAGE>
Total Entertainment Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1998 and 1999
NOTE B (continued)
13. Revenue Recognition
Gaming revenues are recognized when the sporting event or game of chance
has been completed. Credit card deposits held by the Company for individual
customers are recorded as customer account deposits until earned by the
Company or returned to the customer. Gaming revenues are presented on a net
basis (i.e., net of customer winnings).
14. Deferred Licensing Fees
Deferred licensing fees are prepaid costs to acquire a software license,
which are amortized over the four-year term of the license agreement.
Royalty payments, based upon a percentage of winnings, are expensed as
incurred and amounted to approximately $4,500 for the year ended
December 31, 1999. Maintenance fees are expensed as incurred.
15. Deferred Income
At September 30, 1999, the Company recorded $500,000 as deferred income,
resulting from its agreement with Summerhill Gaming Limited ("SGL") (see
Note A-1). The agreement with SGL in substance represents the sale of
future income and is 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. For the year ended December 31, 1999, the Company
recognized $35,000 of such deferred income.
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.
16. Reclassifications
Certain reclassifications to 1998 reported amounts have been made in the
financial statements to conform to 1999 presentation.
F-17
<PAGE>
Total Entertainment Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1998 and 1999
NOTE C - CAPITAL STOCK AND STOCK OPTIONS
1. Common Stock Transactions
The Company has 200,000,000 common shares authorized at $.001 par value.
At the time of the Kit Farms merger, it had been purported that 7.37
million shares of Kit Farms were outstanding. Subsequent to the merger, the
Company was informed that there may be additional shares outstanding, which
were subsequently cancelled by the Company. This matter is currently under
arbitration (see Note D-4). Notwithstanding the arbitration issue, the
existing stockholders of Kit Farms were to continue to hold the 7.37
million shares of the common stock of the merged entity. Intercapital
Global, in its role as agent for the Beneficial Owners, received 104.8
million shares of common stock of Kit Farms, with an aggregate value of
approximately $2 million pursuant to the merger of Mint Energy into Kit
Farms, and the contribution, by the Beneficial Owners, of their shares of
Intercapital Global. The aggregate value was determined through
negotiations among the Boards of Directors of Kit Farms and Mint Energy, in
the absence of reliable quoted market prices on the "bulletin boards."
In February 1998, the Beneficial Owners voluntarily returned to treasury 57
million shares. The shares were subsequently cancelled by the Company. On
February 3, 1998, the Company granted an option (the "Global Option"), to
replace the returned shares, to acquire 57 million shares at $.1875 per
share, exercisable at any time through February 3, 2006, to Intercapital
Global in its role as agent for the Beneficial Owners. Intercapital Global
subsequently transferred the option to Intercapital Asset Management
Limited, an investment management company controlled by Mr. Masselli, which
had the same Beneficial Owners as Mint Energy and Intercapital Global.
Intercapital Global, in its role as agent for the Beneficial Owners,
subsequently distributed 47.8 million shares of common stock it received to
its Beneficial Owners, which, together with the Global Option were
consideration for the merger.
In June 1998, the Company issued an additional 537,000 shares to the former
principal shareholders and directors of Kit Farms to facilitate the merger.
F-18
<PAGE>
Total Entertainment Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1998 and 1999
NOTE C (continued)
2. Stock Options
The Company does not have a formal stock option plan; however, the Company
has issued stock options under letter agreements to certain individuals.
The options granted had an exercise price at least equal to the fair value
of the Company's stock, and expire after eight years. The options granted
vest immediately.
As permitted by SFAS No. 123, the Company has elected to follow Accounting
Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock
Issued to Employees," method of determining compensation cost. Under APB
No. 25, because the exercise price of the Company's employee stock options
equals or exceeds the market price of the underlying stock on the date of
grant, no compensation expense is recognized for options issued to
employees or Directors.
Pro forma information regarding net income is required by SFAS No. 123, and
has been determined as if the Company had accounted for its employees'
stock options under the fair value method of that Statement. The fair value
of these options was estimated at the date of grant using the Black-Scholes
option pricing model with the following weighted-average assumptions:
December 31,
1998
----------------------
Risk-free interest rate 6%
Volatility factor 129%
Expected life of options 7.4 years
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vested
restrictions and are fully transferable. In addition, the option valuation
model requires the input of highly subjective assumptions. Because the
Company's changes in the subjective input assumptions (such as the
volatility factor of thinly traded stock) can materially affect the fair
value estimate, in management's opinion, the existing methods do not
necessarily provide a reliable single measure of the fair value of its
employees' stock options.
F-19
<PAGE>
Total Entertainment Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1998 and 1999
NOTE C (continued)
Had the Company determined compensation cost for this plan in accordance
with SFAS No. 123, the Company's pro forma net loss attributable to common
stock holders and pro forma basic and diluted loss per common share would
have been as follows:
Year ended December 31,
-----------------------------------
1999 1998
---------------- -----------------
Pro forma net loss $(1,190,716) $(2,592,986)
Pro forma basic and diluted loss per
common share $(.02) $(.05)
A summary of the Company's employee and director stock option activity and
related information for the years ended December 31, 1998 and 1999 follows:
Exercise Weighted-
price average
Options per share exercise price
------------- ------------------ ----------------
Balance, December 31, 1997 - $ - $ -
Granted 12,250,000 $.15 - $.1875 .179
----------
Balance, December 31, 1998 12,250,000 $.15 - $.1875 .179
Granted - -
----------
Balance, December 31, 1999 12,250,000 $.15 - $.1875 $.179
========== =====
The weighted-average fair value of options granted was $.16 for the year
ended December 31, 1998. No options were granted in 1999.
F-20
<PAGE>
Total Entertainment Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1998 and 1999
NOTE C (continued)
The following table summarizes information about the shares outstanding and
exercisable for options, including the option held by Intercapital Asset
Management Limited, at December 31, 1999.
Weighted-
average
remaining
Exercise Number contractual life Number
prices outstanding in years exercisable
-------- ----------- ---------------- -----------
$.1875 66,500,000 6.1 66,500,000
.15 2,750,000 6.75 2,750,000
NOTE D - 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.
F-21
<PAGE>
Total Entertainment Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1998 and 1999
NOTE D (continued)
Pending United States Legislation and Other Existing Laws
Governments in the United States or other jurisdictions may in the future
adopt legislation that restricts or prohibits Internet gambling. 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 is currently being considered by the House Judiciary
Committee. There can be no assurance as to whether the Kyl bill or any
similar bill will become law.
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.
F-22
<PAGE>
Total Entertainment Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1998 and 1999
NOTE D (continued)
2. Operating Leases
At December 31, 1998, the Company conducted a portion of its operations in
leased facilities under operating leases expiring at various dates through
July 31, 1999. The Company signed a lease for additional office premises in
June 1999 for a period of five years ending July 31, 2004 for a minimum
annual rent of $22,000 plus operating costs. Certain of the leases contain
escalation clauses for payments of expenses over base rent. The approximate
minimum annual rental commitments under these operating leases currently in
effect at December 31, 1999 are as follows:
Year ending December 31,
2000 $49,000
2001 22,000
2002 24,000
2003 25,000
2004 15,000
--------
Total minimum payments $135,000
========
Rent expense for the years ended December 31, 1998 and December 31, 1999
was approximately $33,000 and $93,000, respectively.
3. Capital Lease Obligations
The Company leases certain equipment under various capital leases which
will expire over the next three years.
F-23
<PAGE>
Total Entertainment Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1998 and 1999
NOTE D (continued)
Minimum payments for the capital leases are as follows:
2000 $27,552
2001 24,192
2002 19,096
-------
Total minimum lease payments 70,840
Less amounts representing interest 8,363
-------
$62,447
=======
Current portion $24,838
Long-term portion 37,639
-------
$62,477
=======
Equipment recorded under capital leases was $100,427. Accumulated
amortization of capital assets subject to capital leases amounted to
approximately $15,000 at December 31, 1999. Interest on capital leases
amounted to approximately $14,000 for the year ended December 31, 1999.
4. 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, 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, 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 believes the
claims asserted in the State Court Action are subject to the mandatory
arbitration provisions in the Merger Agreement and, therefore, intends to seek
dismissal of the State Court Action on that basis. In any event, the Company
intends to vigorously defend itself and believes it has a number of valid
defenses to the Respondents' claims, whether such claims are asserted in the AAA
Action or the State Court Action.
F-24
<PAGE>
Total Entertainment Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1998 and 1999
NOTE D (continued)
Intercapital Global entered into licensing agreements with Intersphere
Communications, Inc. and Interactive Gaming & Communications Corp. in 1998
for the use of casino games and sportsbook computer programs. These
agreements were subsequently terminated and a lawsuit against the Company
ensued. The suit was settled in 2000 at an insignificant cost to the
Company.
The Company and its subsidiaries are a party to various claims and
litigation arising in the normal course of conducting its business. The
Company believes that these matters, taken individually, or in the
aggregate, would not have a material adverse impact on the Company's
financial position or results of operations.
5. Uncertainty Due to the Year 2000 Issue
The year 2000 issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize
the year 2000 as 1900 or some other date, resulting in errors when
information using year 2000 dates is processed. In addition, similar
problems may arise in some systems which use certain dates in 1999 to
represent something other than a date. The Company believes its systems are
year 2000 compliant. The Company has not experienced any year 2000 errors
to date.
F-25
<PAGE>
Total Entertainment Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1998 and 1999
NOTE D (continued)
6. Gaming Software Contracts
On April 9, 1999, the Company signed two agreements with Atlantic granting
it the right to use new casino and sportsbook gaming software for a four-
year period ended April 9, 2003. The terms of the agreement call for the
payment of a total of $247,500 upon signing (which amount has been paid)
and an obligation to pay the licensor a royalty of 7% of the Company's
gaming revenue.
On June 23, 1999, the Company signed two additional agreements with
Atlantic for the rights to two more games for a four-year period ended June
23, 2003. Under the terms of this agreement, the Company paid $102,500 upon
signing and must pay a royalty of 5% and 7%, respectively of the Company's
gaming revenue.
The payments made upon signing are recorded as deferred licensing fees and
expensed over 48 months.
The Company also signed an agreement with Atlantic for support and
maintenance of the licensed software for an initial period of one year
ending June 30, 2000, at a cost of $5,000 per month, subject to
adjustments. As part of the OGS Agreement discussed in
Note A-1, the Company will have no royalty payments and minimal maintenance
costs on an ongoing basis.
Such agreements may be terminated by the vendor upon 30 days' notice, or
the software may become obsolete and outdated, which could have a material
adverse effect on the Company.
7. Income Tax Returns
Through December 31, 1998, Total Entertainment, its subsidiaries and its
predecessor companies including Kit Farms, had not filed all required
income tax returns or other tax returns or reports required by Federal,
State, Local or other jurisdictions. The Company will investigate and
consult with appropriate authorities shortly to establish a plan to become
compliant. For substantially all periods, these entities had not generated
any taxable profits; therefore, management believes the amount of taxes
due, including any potential penalties and interest, for past periods is
not considered significant.
F-26
<PAGE>
Total Entertainment Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1998 and 1999
NOTE D (continued)
8. Credit Card Processing Contract
In August 1998, the Company entered into an agreement with MPACT, whereby
MPACT performs various credit card approval and processing services for the
online casino operations. MPACT receives a fees equal to 7%, subsequently
reduced to 5.75% in 1999, of all approved and settled credit card
transactions, subject to a minimum of $2,000 per month. The agreement is
terminable by the Company with 15 days' notice to MPACT.
MPACT holds a security deposit of $25,000 from the Company, and has a
personal guaranty of
Mr. Masselli.
NOTE E - RELATED PARTY TRANSACTIONS
Mr. Masselli had effective control of Mint Energy and affiliates and
Intercapital Global. Mr. Maselli has effective control of Intercapital Asset
Management Limited.
1. Deferred Compensation
During 1999 and 1998, the officers of the Company did not receive any cash
compensation for their services. Such amounts totalled approximately
$540,000 at December 31, 1999 and $200,000 at December 31, 1998 and are
being deferred by the Company until such time as determined by the relevant
officer. 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 Company by the Board of Directors of the Company to
be paid. The Company anticipates deferring a substantial portion of the
officers' salaries in 2000.
2. Expenses Incurred by Mint Energy
During 1998, the Company's expenses included approximately $65,000 paid to
entities controlled by officers of the Company, principally for computer
programming services. During this period, the Company also received
advances reflected as capital contributions in the amount of $2 million
from its Beneficial Owners for research and development activities relating
to online casinos.
F-27
<PAGE>
Total Entertainment Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1998 and 1999
NOTE E (continued)
3. Due to Directors and stockholders
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 F - INCOME TAXES
Upon filing income tax returns (see Note D-7), the Company could have net
operating losses of approximately $2 million, which could be used to offset
future United States taxable income. However, net operating losses and other
deferred expenses generated in years for which no income tax returns have been
filed, or are not accepted by the Internal Revenue Service, may not be
available. Deferred tax assets arising from these net operating loss
carryforwards, deferred compensation and certain accruals, if any, are fully
reserved due to the uncertainty of future utilization. The Company did not
have any significant taxable income in the United States, Canada or Antigua
for the years ended December 31, 1999 and 1998.
Changes in ownership resulting from transactions among our stockholders and
sales of common stock by us, may limit annual realization of the tax net
operating loss carryforwards that could become available under Section 382 of
the Internal Revenue Code.
NOTE G - SUPPLEMENTARY CASH FLOW INFORMATION
1. In 1998, directors and stockholders paid certain expenses and liabilities
and acquired assets on behalf of the Company as follows:
1998
--------
Software licensing fees $100,000
========
Computer equipment $ 80,032
========
Accounts payable $145,000
========
Development, selling, general and
administrative expenses $172,876
========
F-28
<PAGE>
Total Entertainment Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1998 and 1999
NOTE G (continued)
2. During the year ended December 31, 1999, SGL paid approximately $548,000 of
the Company's obligations to certain of its vendors as follows:
Software licensing fees $350,000
========
Software maintenance $ 27,500
========
Computer equipment $101,000
========
Selling, general and administrative expenses $ 69,456
========
The payments made by SGL for software licensing fees of $350,000 in
addition to the $150,000 in cash paid to the Company was consideration for a
fifty-percent interest in the Slolsvegas website.
Payments for software maintenance, computer equipment and selling, general
and administrative expenses by SGL were loans made to the Company under
their agreement (See Note A).
3. During 1999 the Company paid approximately $6,000 of taxes and $14,000 of
interest.
F-29
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of 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.
By /s/ Sandy J. Masselli, Jr.
-----------------------------
Sandy J. Masselli, Jr.,
Chairman of the Board, Chief Executive
Officer and Director
Date: March 29, 2000
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>
<S> <C> <C>
Signature Title Date
- --------- ----- ----
/s/ Mitchell Brown President, Chief Operating March 29, 2000
- -------------------------- Officer and Director
Mitchell Brown
/s/ T.R. Anthony Malcom Director March 29, 2000
- --------------------------
T.R. Anthony Malcom
/s/ Robert D. Bonnell Director March 29, 2000
- --------------------------
Robert D. Bonnell
/s/ Gala Tse Director March 29, 2000
- --------------------------
Gala Tse
/s/ Richard B. Davis Director March 29, 2000
- --------------------------
Richard B. Davis
</TABLE>
S-1
<PAGE>
Exhibit 10.9
MARKETING AND LICENSE AGREEMENT
This MARKETING AND LICENSE AGREEMENT (the "Agreement") is made and entered
into as of the 14th day of January, 2000, by and between ONLINE GAMING SYSTEMS,
LTD., a corporation established and existing under the laws of the State of
Delaware having its principal place of business at 200 E. Palmetto Park Road,
Suite 200, Boca Raton, FL 33431 ("OGS"), and INTERCAPITAL GLOBAL FUND, LTD,. a
corporation established and existing under the laws of Antigua having a place of
business at 1411 Peel Street, Suite 500, Montreal, Quebec, Canada H3A ("1GF").
BACKGROUND:
A. OGS is actively engaged in the business of developing and
marketing online computer software programs that enable the user to create a
virtual gaming operation over the Internet including those programs set forth on
Schedule A attached hereto (the "Products"); and
B. IGF is actively engaged in the utilization and operation of OGS
Products pursuant to existing license agreements between the parties; and
C. Both parties desire to establish a long term business
relationship through mutual assistance.
NOW, THEREFORE, in consideration of the mutual covenants and premises
contained herein, the parties agree as follows:
1. Definitions.
1.1 "Excluded Products" shall mean OGS's products not listed on Schedule
A attached hereto.
1.2 "Intellectual Property Rights" shall mean any and all patents and
other intellectual property rights of OGS with respect to the Products and
related technology, excluding any such rights related to Excluded Products and
the source code for any of the Products.
1.3 "IGF Operations" shall mean the IGF's offices at the above address.
1.4 "Internet Gaming Venue" shall mean any gaming organization whose
gaming activities are based solely on the Internet without any land based gaming
operations.
1.5 "Level I Services" refer to IGF's responsibility to receive and
report calls from Purchasers regarding technical problems with Products. "Level
2 Services" refer to IGF's responsibility to determine whether there is a valid
problem with the Product or whether the Purchaser's problem results from user
error. "Level 3 Services" refer to
<PAGE>
OGS' responsibility, once a valid problem is identified by IGF, to provide all
forms of technical and maintenance support to Purchasers necessary to detect,
fix and repair such problems and as may be necessary for IGF to perform its
obligations under any Maintenance Agreement.
1.6 "Purchase Price" shall mean the full amount collected by IGF on the
sale or lease of Products after deduction of (a) any collected tax or other
governmental charge on the sale, transportation, use or delivery of the
Products, and (b) any amounts repaid or credited by reasons of returns or
rejections. The Purchase Price shall not include the percentage of net winnings
or royalties which may be received by IGF in connections with the sale or lease
of Products pursuant to its contracts with Purchasers.
1.7 "Purchaser" shall mean any person or entity who purchases or leases
Products from IGF pursuant to the License granted hereunder.
1.8 "Residual Period" shall mean a period beginning on the date of any
termination of this Agreement prior to the end of the initial five year term set
forth in Section 7.1, including as a result of the exercise of IGF's right to
terminate pursuant to Section 7.3, and ending at the end of such initial five
year term.
1.9 "Term Year" shall mean a period of four consecutive calendar
quarters beginning with the calendar quarter of January to March, 2000 and each
of four consecutive calendar quarters thereafter during the term of this
Agreement.
1.10 "Technical Information" shall mean all areas of technology related
to the Products, whether patentable or not, relating to the operation of the
Products, including without limitation equipment specifications, product design
standards instruction manuals, training programs, and any other controls,
processes, systems, documents, equipment and related technology which would be
of assistance in operation of the Products by IGF and its customers, excluding
however any source code and any confidential Technical Information related
thereto.
2. Grant of License.
2.1 OGS hereby grants to IGF an exclusive license (the "License") to
market, sell and lease the Products to all Internet Gaming Venues worldwide.
The License shall be exclusive as to OGS as well as third parties.
2.2 IGF may not sub-license the rights granted hereunder other than to
its affiliates, except with the prior written consent of OGS.
2.3 IGF shall have the right to negotiate and enter into contracts
with Purchasers for the sale or lease of the Products consistent with the terms
of this Agreement.
2
<PAGE>
3. Consideration.
3.1 In consideration for the License, IGF shall receive thirty-three
(33%) percent of the Purchase Price for each Product and OGS shall receive
sixty-seven (67%) percent thereof for the first 15 Products sold by IGF.
Thereafter, IGF shall receive forth (40%) percent of the Purchase Price and OGS
shall receive sixty (60%) percent of the Purchase Price. Subject to IGF's actual
receipt of funds from Purchasers, IGF shall remit to OGS its share of the
Purchase Price on a monthly basis during the term of this Agreement; provided,
however, that for any Products sold or leased by IGF during the term of this
Agreement, IGF shall be entitled to collect and retain its share of the Purchase
Price for the Residual Period. IGF shall be entitled to retain 100% of any and
all royalties (or percentage of net winnings) collected by IGF pursuant to its
contracts with Purchasers.
3.2 In addition, in connection with the sale or lease of a product, each
Purchaser shall enter into an agreement with IGF for the maintenance of such
Product (the "Maintenance Agreement"). Subject to IGF's actual receipt of funds
from Purchasers, IGF shall remit to OGS twenty-five percent (25%) of each
monthly payment of maintenance fees payable under the Maintenance Agreement (the
"Maintenance Payment") on a monthly basis during the term of this Agreement;
provided, however, that for any Products sold or leased by IGF during the term
of this Agreement, IGF shall be entitled to collect and retain its share of the
Maintenance Payment for the Residual Period.
3.3 As additional consideration for the License granted hereunder, IGF
shall distribute or cause to have distributed to OGS a total of 1,500,000 shares
of common stock of its parent company, Total Entertainment, Inc. (OTCBB --
TTLN), with 500,000 shares to be distributed by January 31, 2000, and 250,000
shares per year for the next four years on the anniversary thereof; provided,
however, that IGF shall not be required to distribute any shares to OGS on or
after the date this Agreement shall be terminated pursuant to IGF's rights under
Section 7.3 hereof. Such shares shall be restricted securities under the federal
securities laws and shall be subject to resale restrictions and legended
accordingly. OGS represents that it is acquiring such shares for its own account
and not with a view to any resale or distribution thereof.
3.4 IGF shall receive $15,000.00 of the proceeds from the sale of the
Lucky Dragon Casino as and when received by OGS.
3.5 IGF shall provide one "ICE" Product, as defined on Schedule A, for
the use of IGF in its operation of a Internet Gaming Venues for its own account
without charge.
3.6 IGF currently owns two (2) Bingo Products, as defined on Schedule A,
which IGF may sell and keep the proceeds from such sale.
3.7 IGF shall keep full and accurate books of account containing all
information necessary to compute any monies due OGS under this Agreement. Such
books of
<PAGE>
account shall be kept at the IGF Operations, and shall be available upon
reasonable notice for inspection and audit by financial representatives of OGS
from time to time during regular business hours, but not more than twice in any
calendar year.
4. Marketing of Products.
4.1 IGF shall promptly provide to OGS in writing by fax, e-mail, mail or
via online form information concerning all prospective clients approached by
them.
4.2 Under the Maintenance Agreements, IGF shall be responsible for
providing Level 1 Services and Level 2 Services to Purchasers with respect to
the Products. OGS shall be responsible for providing Level 3 Services to
Purchasers with respect to the Products. OGS shall indemnify and hold IGF
harmless from and against any and all liabilities, claims and expenses under any
Maintenance Agreement that arise from OGF's failure to perform Level 3 Services
in accordance with the terms hereof and the Maintenance Agreements. Unless
otherwise agreed, the Maintenance Agreements shall be in substantially the same
form as those entered into between the parties pursuant to the existing
licensing agreements between the parties.
4.3 IGF shall provide demonstrations of the Products to prospective
customers.
4.4 Prior to making the sale of any Product, IGF shall use its best
efforts to qualify all prospective Purchasers as to quality of operator and
financial ability.
4.5 IGF is authorized to make quotations to customers and to accept
orders on the basis of the Purchase Prices for Products as may be established by
IGF from time to time, provided such prices are above the minimum amount set
forth in Schedule A.
4.6 The parties agree to renegotiate the minimum prices on Schedule A in
the event that OGS adds new games or makes other improvements to the Products.
If the minimum price list is amended pursuant to such a renegotiation after a
quotation has been provided by IGF to a prospective Purchaser, IGF may accept an
order from the Purchaser on the basis of minimum prices set forth in Schedule A
prior to any amendment thereof.
4.7 IGF may make sales at prices or on conditions other than those
provided by OGS, provided that IGF obtains OGS's prior written approval.
4.8 IGF will use its reasonable best efforts to ensure that Purchasers
obtain all necessary business and occupational licences necessary to utilize the
Products to conduct a gaming business over the Internet.
4.9 IGF shall not, under any circumstances, reverse engineer, decompile,
disassemble nor copy the Products.
4
<PAGE>
4.10 OGS shall provide IGF with assistance with demonstrations to
customers and prospective customers when needed provided there is at least one
week notice.
4.11 OGS shall provide sales materials to IGF as soon as practicable
after the date hereof, and from time to time in the future to the extent such
materials are or should be updated.
4.12 OGS shall provide an assignment to IGF within seven (7) days of
execution of this Agreement of all current agreements for the sale of Products,
which agreements are set forth on Schedule B. All payments pursuant to the
current agreements set forth on Schedule B which are due and payable after the
date of this Agreement shall be paid to IGF.
4.13 OGS shall assist in the hiring and training of the IGF technical
support staff in such manner as to enable such staff to carry out their
maintenance and support responsibilities hereunder.
4.14 IGF and OGS shall cooperate and participate with each other in a
variety of joint marketing efforts relating to the Products and other products
that they agree on, including, without limitation, efforts to devise short and
long term strategies, to identify product needs, to develop product concepts and
optimum product specifications, and to provide distribution and service in
furtherance of joint marketing goals. IGF and OGS agree to share all information
for product planning unless prohibited by law or by any contracts or agreements
with a third party. IGF and OGS shall be jointly responsible for coordinating
the planning and execution of all promotional activities for the products. IGF
and OGS shall cooperate in connection with their participation in trade shows
including, without limitation, sharing resources and costs, in a mutually
agreeable manner, to maximize the mutual benefits of such shows to the parties.
IGF and OGS shall endeavor to utilize each other's products as much as possible
for displays and product demonstrations at trade shows, if such utilization is
warranted and mutually agreeable to the parties. IGF and OGS shall cooperate to
finalize the layout of trade show booths and displays for trade shows in which
they are both participating, the specifications of the products, the number of
items to display, and the way they run the trade shows.
5. Names and Marks.
5.1 IGF shall have the exclusive right to use OGS's trademarks and trade
names ("Names and Marks") only in connection with the sale and maintenance of
the Products and any other transactions covered by this Agreement. IGF shall
identify OGS as the owner of the Names and Marks.
5.2 IGF shall use and refer to the name of OGS as the owner of the
Intellectual Property Rights in an appropriate manner.
5
<PAGE>
6. Confidentiality.
6.1 Each of the parties hereto agrees to keep strictly secret and
confidential any and all Technical Information and other confidential
information identified as such and acquired from the other party hereunder and
not to disclose it to any third persons or use it except as permitted by this
Agreement.
6.2 The obligation imposed by this Section shall not apply to any
information:
(a) which at the time of disclosure is in the public domain; or
(b) which after disclosure becomes part of the public domain, by
publication or otherwise, through no fault of the recipient party, or
(c) which at the time of disclosure is already in the recipient party's
possession, and such possession can be properly demonstrated by it; or
(d) which is rightfully made available to one party from sources
independent of the other party, or
(e) the disclosure of which is agreed in writing by the other party.
The obligations of this Section shall survive for a period of five (5) years,
after the termination of this Agreement for any reason.
7. Term and Termination.
7.1 Term: This Agreement shall be for an initial term of five (5) years,
commencing on the date of this Agreement.
7.2 Renewals: This Agreement shall be automatically reviewed for an
additional term of five (5) Years provided both parties provide the other party
with written notice of the election to renew this Agreement on or before the
sixtieth (60th) day prior to the then expiring term.
7.3 Termination: Either party shall have the right to terminate this
Agreement prior to the expiration of its Term of any renewal upon giving thirty
(30) days written notice to the other. Notwithstanding the foregoing, IFG shall
have the right, in its discretion, to terminate this Agreement on each
anniversary of the date hereof during the initial term or any renewal thereof
upon thirty (30) days written notice to OGS.
7.4 Either party may terminate this Agreement in the event that
proceedings for reorganization, liquidation, bankruptcy or receivership are
filed or instituted against or by the other party.
6
<PAGE>
7.5 Either party may terminate this Agreement upon the breach of this
Agreement by the other party, which breach is not cured within 30 days of
receiving written notice thereof.
8. Payments. All payments to be made under this Agreement shall be in
United States dollars.
9. Arbitration. Any dispute between the parties arising out of or
concerning the subject matter of, or the respective rights and obligations of
the parties under, this Agreement shall be submitted to arbitration if it cannot
be resolved by the parties. If arbitration is requested by OGS, the arbitration
proceeding shall be conducted in Boca Raton, Florida in accordance with the
rules of the American Arbitration Association; if arbitration is requested by
IGF, the arbitration proceeding shall be conducted in New York, New York in
accordance with the rules of the American Arbitration Association then in
effect.
10. Governing Law. This Agreement and the rights and obligations of the
parties hereunder shall be construed and interpreted in accordance with the laws
of Florida.
11. Force Majeure. Both parties to this Agreement shall be excused from
the performance of their obligations hereunder, and shall be excused for so long
as such condition continues, if such performance is prevented by conditions
beyond the control of the parties, such as acts of God, voluntary or involuntary
compliance with any regulation, law or order of any government, war, civil
commotion, strike, epidemic, failure or default of public utilities or common
carriers, destruction of production facilities or materials by fire, earthquake,
storm or like. This Section does not apply to the IGF's inability to get
exchange of currency to fulfill its payment obligations under this Agreement. If
exchange of currency is blocked for more than one year, OGS may terminate this
Agreement or request payment in other currency.
12. Notice Provisions. Any notice required or permitted to be given
hereunder shall be in writing and any notice shall be deemed to have been given
when delivered in person or seven (7) days after the date upon which it was
mailed, postage prepaid, by certified or registered air mail properly addressed
to the addresses written on the first page of this Agreement; provided, however,
that the presumption of actual receipt shall be subject to rebuttal by probative
evidence showing that such notice was not actually received.
12. Assignment. Neither this Agreement nor any rights or obligations
hereunder may be assigned by either party without the prior written consent of
the other party. Notwithstanding the foregoing, either party may assign all of
its rights and obligations under this Agreement to any entity which acquires
such party by merger, consolidation or purchase of substantially all of the
assets or business of such party related to the Products.
7
<PAGE>
13. Entire Agreement. This Agreement shall constitute the entire
agreement of the parties with respect to the subject matter of this Agreement.
14. Amendments: Counterparts. This Agreement may not be amended or
modified except pursuant to a writing signed by both parties. This Agreement may
be excuted in one or more counterparts, and all such counterparts, when taken
together, shall constitute one agreement.
15. Benefit of Agreement. This Agreement is made solely for the benefit
of the parties and no other person shall acquire or have any right under or by
virtue of this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to this
Agreement to be executed by their duly authorized officers as of the above date.
INTERCAPITAL GLOBAL FUND, LTD. ONLINE GAMING SYSTEMS, LTD
By: /s/ Sandy J. Masselli, Jr. By: /s/ Richard Iamunno
-------------------------- -------------------------
Name: Sandy J. Masselli, Jr. Name: Richard Iamunno
Title: Chairman and CEO Title: President & CEO
8
<PAGE>
Exhibit 10.10
INFORMATION PROVIDER SERVICES AGREEMENT
---------------------------------------
THIS SERVICES AGREEMENT (hereinafter referred to as the "Agreement") is
entered into as of this 1st day of February, 2000, (hereinafter referred to as
the "effective date"), by and between CARIBBEAN ENTERTAINMENT INTERNATIONAL,
S.A., having its principal office at Bahia de Arena, Casa 19, Main Street,
Cabarete, Dominican Republic (hereinafter referred to as "SP") and INTER CAPITAL
GLOBAL FUND, LTD., (hereinafter referred to as "IP"), having its principal
office at: 1 High Street, St. John, Antigua.
BACKGROUND
SP has developed a number of internet services relating to coordination,
delivery, pick up, server installation, licensing fee and hosting of internet
gaming services, as well as other services also described below.
SP and IP desire to enter into an Agreement to document the terms and
conditions under which IP may utilize the services and systems of SP for the
provisions of offshore gamings and wagering as referred to in the Internet
Gaming License issued by the government of the Dominican Republic.
In consideration of the mutual covenants hereinafter set forth, the
receipt and sufficiency of which is hereby acknowledged, the parties intending
to be legally bound hereby covenant and agree as follows:
SP Services: SP will provide to IP the services more specifically
-----------
described below in accordance with the terms and
1
<PAGE>
conditions of this Agreement, with the understanding that IP shall provide
offshore games of chance and wagering as referred to in the Internet Gaming
License issued by the government of the Dominican Republic:
1. Coordination of delivery, pick up, customs clearance of any servers
needed (customs duty to be billed separately).
2. Server installation and set up.
3. Project coordination.
4. Related legal documents.
5. The conditional transfer of shares, control and ownership of the
entity known as 21 del Notre, S.A., being a company which is the
beneficial owner of a properly authorized gaming license held
in the Dominican Republic.
The parties agree that the initial fee paid upon the signing of this Agreement
shall be Twenty Thousand and 00/100 Dollars, U.S., ($20,000.00) which will
incorporate the above services.
License Fee and Hosting: SP will host the properly transferred ownership
-----------------------
license for IP on the following terms and conditions, with the fee being Ten
Thousand and 00/100 Dollars, U.S., ($10,000.00) per month. Included in that fee
is:
1. Twenty-four (24) hour, seven (7) days a week multi-lingual hardware
support.
2. The technician will handle all on site upgrades and server
maintenance.
2
<PAGE>
3. As much as needed kbs (shared line) per OGS system (additional bandwidth is
available at an additional charge of One Thousand Five Hundred and 00/100
Dollars, U.S. ($1,500.00) as much as needed kbs of bandwidth or any part
thereof).
4. A total of three (3) OGS casinos. (Each additional casino shall be an
additional Two Thousand and 00/100 Dollars, U.S. ($2,000.00) per month.)
5. Secure office environment to house the servers.
6. Proprietary CEI FirewallTM license.
Fees and Expenses: IP agrees to pay for the services at the rates set
-----------------
forth above, in accordance with the terms and conditions of this Agreement. The
hosting and licensing fees shall be due in advance on the 1st day of each and
every month for the month following the payment of that fee. These monthly fees
shall be prorated for any partial month. In addition, IP agrees to pay a use
tax imposed by the government of the Dominican Republic for all services
rendered. This use tax is presently seventeen (17%) percent of the total
monthly billing.
21 del Notre, S.A.: In order for SP to provide IP with a valid
------------------
Internet Gaming License, it is necessary to transfer the shares, control and
ownership of the entity 21 del Notre, S.A. to IP. Although SP has transferred
ownership of 21 Del Notre, S.A. to IP, the payments pursuant to this Agreement
shall be made to SP for this company and licenses stated above. SP will be
responsible for making any and all payments to the government of the Dominican
3
<PAGE>
Republic. Should IP terminate this Agreement for any reason other than cause as
described in herein, then IP will immediately assign, relinquish ownership of
and turn over control and ownership of the entity 21 del Notre, S.A. to SP. IP
will sign documents to be held by SP to effectuate that transfer at the time of
signing this Agreement in the form of valid Powers of Attorney to allow that
transfer to take place.
Should SP cease to operate permanently, then IP will retain the
ownership interest in 21 del Notre, S.A.
Because the parties have agreed that payment is of the essence, SP
reserves the right to have access to all games at any time that the hosting,
late fees, or the licensing fees are not paid immediately upon being due. IP
shall have ten (10) days to pay all fees due so that it complies with the
required amounts. Any payment received after the tenth day of any month will
require an additional late fee of fifteen (15%) percent of that payment.
Rights to Operate: SP may grant additional rights to operate to third
-----------------
parties for the purposes of exploiting games of chance via the internet and
telephone service lines under its license during and after the term of this
Agreement.
Hardware Support: As listed in the services, SP shall provide twenty-
----------------
four (24) hours a day, seven (7) days a week hardware support. SP will insure
that the continual operation of IP's servers. Should IP's servers go down, SP
will have all service up and running within one (1) hour after notification of
such down time if reasonably practicable. Unless the service has crashed and
4
<PAGE>
SP is unable to replace parts for the specific machine supplied by IP, in such
case, SP will use its best efforts to locate the replacement of parts and have
them delivered by the fastest means possible. Because IP is providing the
hardware, SP has no control over that hardware. SP also has no control over the
telephone lines, and should there be a technical problem with the telephone
lines, SP will use its best efforts to have the lines repaired. SP has been
notified by its telephone line carrier that any problems with the lines will be
fixed within six (6) hours and SP and IP agree that SP is at the beck and call
of the telephone line carrier.
Technical Support: Technical support is available on the following
-----------------
telephone numbers:
1. Monday through Saturday from 9:00 a.m. until 5:00 p.m.
(809) 571-0252.
2. All other hours, (809) 383-9150 or (809) 383-6160.
Confidentiality: During the course of performance of this Agreement each
---------------
party may disclose to the other certain business technology, research, customer,
pricing and/or business information, formulas or procedures which the disclosing
party considers to be, and treats, as confidential or proprietary information.
Each party shall maintain the other party's confidential information in
confidence, shall protect it with a reasonable level of protection which shall
be not less than the same degree of protection which it uses to protect its own
5
<PAGE>
confidential information, shall not disclose to any third party without prior
written approval, and shall use it for the sole purpose of performing under this
Agreement. Each party shall be responsible for the actions of its employees,
consultants and contractors, with respect to confidential information from the
other party. At the conclusion of this Agreement, each party shall either
return the other parties confidential information in its possession, including
all copies, or shall, at the other parties direction, destroy the other parties
confidential information, including all copies and certify destruction to the
other party.
For the purposes of this section, confidential information does not
include information in the public domain at the time of disclosure or
information that is independently developed by the receiving party without
reference to the disclosing party.
This confidentiality agreement shall be in full force and effect for
the entire term of this Agreement and for as long thereafter as the confidential
information does not make it to the public domain or enter the public domain
through no fault of either party.
In addition, neither party shall disclose the terms and conditions of
this Agreement to any third party without the other party's written consent
- --------------
which consent shall not be withheld or delayed unreasonably.
Term and Termination: This Agreement shall be for a term of five (5)
--------------------
years and shall terminate upon the earlier of the following occurrences:
6
<PAGE>
party feels that there is a substantial default in the provisions of this
Agreement. However, prior to termination, it must serve in writing to the
other party thirty (30) days prior to the effective date of termination,
its intent to terminate and the reasons therefore and give the defaulting
party thirty (30) days to cure the default.
3. Five (5) years after the effective date of this Agreement.
The parties agree that this Agreement will automatically re-new annually,
however, the minimum monthly fees must be re-negotiated subsequent to the
terms of the five (5) year Agreement.
4. If either party is in default or grossly negligent in the
performance of its duties or obligations under this Agreement, or declares
voluntary bankruptcy or involuntary bankruptcy is forced on either of the
parties, or declares a state of succession of payments or enters into an
arrangement for the benefit of creditors or into a court sanctioned
moratorium on payments then this Agreement may be terminated by SP or IP,
with proper notification, as outlined above.
7
<PAGE>
Indemnification: IP shall indemnify and hold SP, its affiliates,
---------------
directors, employees, officers, agents, licensors, harmless from any and all
claims, demands, actions, liabilities, damages, obligations, costs and expenses,
including attorney's fees and experts fees arising from the breach of this
Agreement or from SP's own negligence.
Force Majeure: Both parties agree that neither party shall in any way be
-------------
responsible for failure to perform hereunder due to force majeure which shall
include, but not be limited to, fires, floods, riots, strikes, power failures,
labor disputes, freight embargoes, transportation delays, acts of vendors and
suppliers, concealed acts of workmen, alteration of domestic or international
rules and regulations, disconnection from the service lines, or any other cause
which is beyond the reasonable control of either party. If force majeure shall
occur, the affected party shall promptly give notice thereof to the other party
and use the best efforts to cure or correct such event of force majeure. Any
party hereto may, during the period of shortage or delay due to any such cause,
prorate its supply and/or payment in such a manner as deemed equitable to the
judgment of each party.
Any delay in the performance of any of the duties or obligations of either
party herein (except the payment of money owed) shall not be considered a breach
of this Agreement and at the time required performance shall be extended for
period equal to the period of such delay provided that such delay has been
caused by or is the result of any acts of God, acts of public enemy,
8
<PAGE>
insurrections, riots, embargoes, labor disputes, including strikes, lockouts,
job actions or boycotts, computer or device malfunctions beyond SP's reasonable
control, suspension or disruption of services of the internet, any internet or
common communication carrier, any explosion or flood. The parties so effected
shall give prompt notice to the other party of such cause and shall take
whatever steps are reasonably necessary to relieve the effects of the cause as
rapidly as possible.
Default: As previously described in the event either party is in default
-------
of any of the major provisions of this Agreement, the non-defaulting party may
give thirty (30) days written notice to the defaulting party and upon
continuation of the breach of the defaulting party, immediately terminate the
provisions of the service and terminate this Agreement. The defaulting party
shall immediately cease the activities relating to this Agreement upon receiving
that notice in writing.
Binding Decisions of SP: IP understands and agrees that SP may from time
-----------------------
to time make certain decisions with respect to the services being provided and
as long as those decisions do not substantially alter the nature of the services
contemplated in this Agreement, SP shall have the right to make those decisions
which shall be final and binding and will give notice to IP of those decisions
by telephone, to be confirmed in writing.
Governing Law: In the event of litigation, the choice of venue and
applicable law under which this Agreement is to be construed shall be at the
sole and complete discretion of SP.
9
<PAGE>
While this provision seems broad, IP agrees that based on the nature of the
services provided and the area in which the parties operate, all issues
regarding to subject matter of the license as referred to in this Agreement,
shall be construed and enforced with the laws and the venue at the choice of SP.
Each party hereby expressly designates its respective signatory of this
Agreement as an authorized agent on which any and all legal process may be
served in any action, suit or proceeding brought pursuant to this Agreement.
Notices: All notices and requests in connection with this Agreement shall
-------
be deemed given as they are received if given by either messenger, delivery
service, or by mail, postage prepaid, certified or registered, and addressed as
set forth in the signature page hereof, or to such other address as the parties
so designate by written notice to each party. Notice shall be deemed to have
been given or made as of the date so delivered, if delivered personally.
No Third Party Beneficiaries: This Agreement is for the sole and exclusive
----------------------------
benefit of SP and IP. It shall not be deemed to be for the direct or indirect
benefit of any other customer, person, institution, or corporation and the
customers of IP shall not be deemed to be third party beneficiaries of this
Agreement or to have any contractual relationship with SP or IP by any reason of
this Agreement.
Waiver: The failure of any party to exercise any right hereunder or to
------
insist upon strict compliance by the other party
10
<PAGE>
shall not constitute a waiver of either parties rights to demand strict
compliance with the terms and conditions of this Agreement.
Assignment: IP may not assign or transfer its rights or obligations under
----------
this Agreement without the prior written consent of SP. A change of ownership
of over fifty (50%) percent of the voting stock or interest in IP, shall be
deemed an assignment hereunder. Subject to the foregoing, this Agreement shall
inure to the benefit of and be binding upon all parties and their respected
permitted successors and assigns, however, any attempted assignation or transfer
without the express consent of SP shall be null and void.
Amendment: This Agreement may be amended only in writing and signed by
---------
both parties.
Entire Agreement: This Agreement constitutes the entire Agreement between
----------------
the parties as to the subject matter hereof and supersedes all or
contemporaneous agreements, negotiations, representations, and proposals, both
written and oral.
Notices: Any notice, communications, request, instruction or other
-------
document required or permitted hereunder shall be given in writing, either
delivered in person or by courier, Federal Express, or telegram, and delivered
as follows:
If to SP: Bahia de Arena, Casa 19, Main Street, Cabarete,
Dominican Republic.
If to IP:
----------------------------------------------------
----------------------------------------------------
11
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed by each of the parties
hereto, on the date first above written.
Witnesses: CARIBBEAN ENTERTAINMENT
INTERNATIONAL, S.A.
(SP)
By:
- --------------------------------- ------------------------------
Signature Signature
- --------------------------------- ---------------------------------
Printed Printed and Title
- ---------------------------------
Signature
(Corporate Seal)
- ---------------------------------
Printed
INTER CAPITAL GLOBAL FUND, LTD.
Witnesses: (IP)
/s/ Laureen Lee Dunn By: /s/ Sandy J. Masselli, Jr.
- --------------------------------- ------------------------------
Signature Signature
Laureen Lee Dunn Chairman/CEO
- --------------------------------- ---------------------------------
Printed Printed and Title
/s/ Hannah Knueppel
- ---------------------------------
Signature (Corporate Seal)
Hannah Knueppel
- ---------------------------------
Printed
12
<PAGE>
Exhibit 10.11
PURCHASE AGREEMENT
------------------
THIS PURCHASE AGREEMENT is made and entered into on this the 1st day of
March, 2000, by and between INTERCAPITAL GLOBAL FUND, LTD., an Antigua and
Barbados corporation, having its principal place of Business at One High Street,
St. John, Antigua (hereinafter referred to as Seller) and NETFORFUN.COM INC., a
publicly held Canadian company, having its principal place of business at #3
Rainbow Creek Way, Toronto, Ontario, Canada M2K1T9, (hereinafter referred to as
"Buyer").
Article 1. Purchase and Sale
----------------------------
In consideration of the mutual promises and conditions herein contained,
Seller hereby agrees to sell to Buyer, and Buyer agrees to purchase from Seller
on the terms, conditions, warranties and representations set forth in this
Agreement, one half (50%) of the business including Domain names and all assets
tangible or intangible owned by Seller under the names of SLOTSVEGAS.COM,
SLOTSVEGAS.NET and SLOTSVEGAS.ORG and located at 1411 Peele Street, Suite #500,
Montreal, Quebec, Canada H3G2A9 (hereinafter referred to as "the Business") and
all customer deposits on hand and in those names at the time of the signing of
this Agreement.
Article 2. Amount of Purchase
-----------------------------
The total purchase price to be paid by Buyer to Seller for one half
(50%) of all the properties, assets, rights and customer deposits of the
Business described in this Agreement (hereinafter referred to as the "Purchase
Price"), shall be TWO MILLION DOLLARS ($2,000,000.00) in United States
currency.
Article 3. Payment of Purchase Price
------------------------------------
The Total Purchase Price shall be paid in United States dollars as
follows:
(a) $100,000.00 in cash, check or the equivalent, shall be paid when
this Agreement is signed
(b) $400,000.00 shall be paid by delivery from Buyer to Seller of a
Five (5) year Promissory Note executed in favor of Seller by Buyer which shall
bear interest from the date of its execution at 9% per year and principal and
interest shall be payable in equal quarterly installments beginning on or before
the 1st day of July, 2000, in the quarterly amount of $24,910.02 each.
(c) $1,500,000.00 shall be paid by delivery from Buyer to Seller of
15,000,000 shares of common stock in Netforfun.com Inc. with a strike price of
0.10 cents per share U.S. The stock issued to Seller shall be that stock that is
issued after stock reversals are made by Buyer.
<PAGE>
Article 4. Closing
------------------
At the closing the seller shall:
(a) execute all documents necessary to finalize this Agreement
and transfer all customer deposits on hand at the time of
the closing.
At the closing the Buyer shall:
(a) Pay Seller $100,000.00 in cash, check or the equivalent,
(b) Execute the note to Seller for $400,000.00 U.S. dollars under
the terms and conditions set forth hereinabove,
(c) Issue 15,000,000 shares of Netforfun.com Inc. common stock to
Seller, and
(d) Execute all other documents necessary to finalize this
Agreement.
Article 5. Representation, Warranties, Covenants
------------------------------------------------
and Agreements by Seller
------------------------
Seller hereby agrees and warrants and represents to Buyer that:
(a) Seller is the lawful owner of the Business and has good right
and due authorization to sell the same. At the time of signing
this Agreement Seller neither knows nor has reason to know of
the existence of any outstanding claim or title, or interest, or
lien in, to or on the Business except as shown on the financial
records of the Business;
(b) Seller owes no obligations and has contracted no liabilities
effecting the Business or which might affect to consummation of
the purchase and sale described in this Agreement that have not
been expressly disclosed to Buyer;
(c) No litigation, actions or proceedings legal, equitable,
administrative, including but not limited to lawsuits, claims or
disputes are pending or threatened which might affect the
Business, the assets being purchased, or the consummation of the
purchase and sale described in this Agreement; and
(d) Seller agrees to indemnify and hold Buyer harmless from and all
claims, causes of actions, damages, or debits, including legal
fees, resulting from any actions, occurrences or events
occurring prior to the Closing.
Article 6. Nonassumption of liabilities
---------------------------------------
Unless otherwise expressly provided for herein, the liabilities and
obligations incurred by Seller prior to the Closing are not being assumed by
Buyer but continue as liabilities and obligations of Seller and shall be solely
paid by Seller.
In the event Buyer is required to pay after the Closing any valid debt
or expense incurred by Seller prior to the Closing, Buyer shall have the right
to offset any such debt or expense actually paid by it, which is the valid and
legal obligation of the Seller, against any payment owed to Seller by Buyer.
<PAGE>
Article 7. Default
------------------
After execution of this Agreement by the parties, default shall be the
failure of either party to perform their respective obligations and duties
and/or shall be a breach of a warranty or covenant herein.
In the event of default of either party, Seller and Buyer shall have the
right to sue for specific performance and/or sue for damages in addition to any
other relief provided in this Agreement. In a suit for default, reasonable
attorney's fees shall be recoverable by the prevailing party.
Article 8. General and Administrative Provisions
------------------------------------------------
Parties Bound. This Agreement shall be binding upon and inure to the
-------------
benefit of the parties hereto and their respective successors and permitted
assigns.
Assignment. The Seller shall have no right to transfer or assign its
----------
interest in this Agreement without the prior written consent of the Buyer.
Corporate Authority. Each party hereto represents unto the other that
-------------------
this Agreement, the transaction contemplated herein, and the execution and
delivery hereof, have been duly authorized by all necessary corporate
proceedings and actions, including without limitation, the action on the part of
the directors. Certified copies of such corporate or other resolutions
authorizing this transaction shall upon request be delivered at the closing.
Applicable Law. This Agreement shall be construed, interpreted and
--------------
enforced in accordance with and the respective rights and obligations of the
parties shall be governed by, the laws of the Province of Ontario and the
federal laws of Canada applicable therein, and each party hereto, irrevocably
and unconditionally submits to the non-exclusive jurisdiction of the courts of
such province and all courts competent to hear appeals therefrom.
Severability. If any provision of this Agreement is determined by a
------------
court of competent jurisdiction to be invalid, illegal or unenforceable in any
respect, such determination shall not impair or affect the validity, legality or
enforceability of the remaining provisions hereof, and each provision is hereby
declared to be separate, severable and distinct.
Amendment and Waivers. No amendment or waiver of any provision of this
---------------------
Agreement shall be binding on any party unless consented to in writing by each
party hereto. No waiver of any provision of this Agreement shall constitute a
waiver of any other provision, nor shall any waiver constitute a continuing
waiver unless otherwise expressly provided.
Entire Agreement. This Agreement constitutes the entire agreement
----------------
between the parties with respect to the subject matter hereof and supersedes all
prior agreements, understandings, negotiations and discussions, whether written
or oral. There are no conditions, covenants, agreements, representations,
warranties or other provisions, express or implied, collateral, statutory or
other wise, relating to the subject matter hereof except as herein provided.
Notices. All notices or other communications required or permitted to be
-------
given pursuant to this Agreement shall be in writing and shall be delivered in
person, transmitted by telecopy or similar means or recorded electronic
communication or sent by registered mail, charges prepaid, and addressed as
follows:
<PAGE>
If to Seller: Intercapital Global Fund, Ltd.
1411 Peele Street, Suite #500
Montreal, Quebec H3G2A9
Attn: Mr. Sandy Masselli, Jr., Chairman
If to Buyer: Netforfun.com Inc.
#3 Rainbow Creek Way
Toronto, Ontario M2K1T9
Canada
Attn: Mr. John Bentivoilo, Senior Vice
President and Director
A party may change its address for notice by giving notice of such
change to the other party in writing.
This Agreement may be executed in counterparts, each of which shall
constitute an original and all of which taken together shall constitute one and
the same instrument.
IN WITNESS WHEREOF this Agreement has been executed by the parties.
INTERCAPITAL GLOBAL FUND, LTD.
---------------------------------
Sandy Masselli, Jr.
Chairman
NETFORFUN.COM INC
/s/ John Bentivoilo
---------------------------------
John Bentivoilo
Senior Vice President and Director
<PAGE>
PROMISSORY NOTE
---------------
Date: March 1, 2000
Maker: Netforfun.com Inc.
Mailing address: #3 Rainbow Creek Way, Toronto, Ontario, M2K1T9, Canada
Payee: Intercapital Global Fund, Ltd.
Mailing address: One High Street, St. John, Antigua
Place for Payment: 1411 Peele Street, Suite #500, Montreal Quebec, H3G2A9,
Canada
Principal Amount: FOUR HUNDRED THOUSAND AND NO/100 ($400,000.00)
Annual Interest Rate on Unpaid Principal from Date: Nine Percent (9%)
Terms of Payment (principal and interest): In equal quarterly installments of
$24,910.02 each beginning on July 1, 2000 and continuing thereafter until paid.
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. All unpaid amounts shall be due by the final scheduled payment
date. This note may be prepaid, in whole or in part, at any time without
penalty.
If Maker defaults in the payment of this note, and the default continues
after Payee gives Maker notice of the default and the time within which it must
be cured, as may be required by law or by written agreement, then Payee may
declare the unpaid principal balance on this note immediately due. Maker waives
all demands for payment, presentations for payment, notices of intention to
accelerate maturity, notices of acceleration of maturity, protests, and notices
of protest, to the extent permitted by law.
If this note is given to an attorney for collection, or if suit is
brought for collection, or if it is collected through probate, bankruptcy, or
other judicial proceeding, then Maker shall pay Payee all costs of collection,
including reasonable attorney's fees and court costs, in addition to other
amounts due. Reasonable attorney's fees shall be 10% of all amounts due unless
either party pleads otherwise.
Interest on the debt evidenced by this note shall not exceed the maximum
amount of nonusurious interest that may be contracted for, taken, reserved,
charged, or received under law. This provision overrides other provisions in
this and all other instruments concerning the debt.
When the context requires, singular nouns and pronouns include the
plural.
Netforfun.com Inc.
By /s/ [ILLEGIBLE]
--------------------------
Senior Vice President and Director
Maker
<PAGE>
PROMISSORY NOTE
---------------
Date: March 1, 2000
Maker: Netforfun.com Inc.
Mailing address: #3 Rainbow Creek Way, Toronto, Ontario, M2K1T9, Canada
Payee: 1/st/ American Mutual Funds, Inc.
Mailing address: 26 Broad Street, Red Bank, New Jersey 07701
Place for Payment: 26 Broad Street, Red Bank, New Jersey 07701
Principal Amount: ONE HUNDRED THOUSAND AND NO/100 ($100,000.00)
Annual Interest Rate on Unpaid Principal from Date: Nine Percent (9%)
Terms of Payment (principal and interest): Due on demand
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. All unpaid amounts shall be due by the final scheduled payment
date. This note may be prepaid, in whole or in part, at any time without
penalty.
If Maker defaults in the payment of this note, and the default continues
after Payee gives Maker notice of the default and the time within which it must
be cured, as may be required by law or by written agreement, then Payee may
declare the unpaid principal balance on this note immediately due. Maker waives
all demands for payment, presentations for payment, notices of intention to
accelerate maturity, notices of acceleration of maturity, protests, and notices
of protest, to the extent permitted by law.
If this note is given to an attorney for collection, or if suit is
brought for collection, or if it is collected through probate, bankruptcy, or
other judicial proceeding, then Maker shall pay Payee all costs of collection,
including reasonable attorney's fees and court costs, in addition to other
amounts due. Reasonable attorney's fees shall be 10% of all amounts due unless
either party pleads otherwise.
Interest on the debt evidenced by this note shall not exceed the maximum
amount of nonusurious interest that may be contracted for, taken, reserved,
charged, or received under law. This provision overrides other provisions in
this and all other instruments concerning the debt.
When the context requires, singular nouns and pronouns include the
plural.
Netforfun.com Inc.
By /s/ [ILLEGIBLE]
--------------------------
Senior Vice President and Director
Maker
<PAGE>
Intercapital Global Fund, Ltd.
Software Support Maintenance Agreement
THIS AGREEMENT (hereinafter Agreement), made and entered into by and between
Intercapital Global Fund, Ltd., having its principal place of business at One
High Street, St. John, Antigua (hereinafter referred to as IGF); and
Netforfun.Com Inc. having its principal place of business at: #3 Rainbow
Creek Way, Toronto Ontario M2K1T9. Hereinafter referred to as Customer).
1. DEFINITIONS
For the purpose of this Agreement, the following terms shall have the meanings
ascribed to them.
EFFECTIVE DATE. The term Effective Date shall mean first date of signing of this
Agreement.
IMPROVEMENTS. Improvements to the Licensed Software are designated by a change
to the products release indicator (up to next whole number release).
Improvements generally comprise maintenance modifications or minor enhancements
to functionality. Improvements exclude versions. Versions are comprised of
significant enhancements to functionality. If there is any issue whether a new
release is an Improvement or a version, it shall be within IGF's sole discretion
to much such determination.
LICENSED SOFTWARE. The term Licensed Software shall mean the computer program(s)
as detailed in Attachment A. The Licensed Software shall include Improvements as
defined above. Licensed Software will be distributed in Object Code only format.
OBJECT CODE. Object Code shall exist solely of code, substantially or entirely
in binary form, which is directly executable by a computer after suitable
processing, but without the intervening steps of compilation or assembly. Object
Code shall not include any Source Code.
TECHNICAL INFORMATION. The term Technical Information shall mean the material
supplied by IGF in printed form or on magnetic media that supports the Licensed
Software and describes its installation, operation, or maintenance.
USER. The entity or persons, including but not limited to employees or
contractors who are licensed to run the Licensed Software.
<PAGE>
II. MAINTENANCE AND SUPPORT SERVICES
Standard Software Maintenance Services shall include: Telephone
maintenance support of the Licensed Software. Said maintenance and support
shall be available Monday through Friday, 8:00AM - 6:00PM EST, exclusive of
holidays at (561) 393-6685. The Customer Support Center number after 6:00PM is
888-580-0980.
. Improvements that are made generally available on the current version.
. Technical Information updates to support Improvements.
. Program upgrades.
. New games as they are developed.
. A thirty (30) day warranty period on the media.
. PC Anywhere is required for Support and Maintenance services.
. No other software can reside on the IS or Database servers at anytime.
If a Customer from time to time desires to obtain maintenance and
support services other than those specified above, or desires to obtain services
to accomplish modifications or enhancements to the Licensed Software not covered
by this Agreement, Customer may notify IGF of the services desired and, such
services shall be provided at the then current fees.
ADDITIONAL SERVICES
Additional services compromising a total turnkey solution shall include:
. Installation and hosting of the servers in Dominican Republic.
. Equipment Maintenance.
. Communication lines with sufficient bandwidth.
. Gaming License in Dominican Republic.
. System Management and Administration
. 24/7/365 Call center from Canada
. Online Customer service
. Merchant Banking Services and Administration
through DMS.
III. INTELLECTUAL PROPERTY
Any Improvements in the form of new or partial programs or
documentation, Technical Information and maintenance and support information,
that may be provided during the terms of this Agreement by IGF shall remain
proprietary to IGF and title thereto remains with IGF. All applicable rights to
patents, copyrights, trademarks, trade secrets and other intellectual or
proprietary rights and interests in the Licensed Software and Improvements
thereto by IGF are and shall remain with IGF. The Customer shall not sell,
transfer, publish, disclose, display, or otherwise make available the Licensed
Software or Improvements thereto or copies thereof to others, with exception of
the access to the Client. Customer agrees to secure and protect each program,
software product, and copies thereof in a maner consistent with the maintenance
of IGF's rights therein and to take
<PAGE>
appropriate action by instruction or agreement with its employees who are
permitted access to each program or software product to satisfy its obligations
hereunder. All copies of the Licensed Software, or Improvements, including
translations, compilations, partial copies with modifications, and updated works
by IGF are the property of IGF.
IV. WARRANTIES
IGF warrants that the Licensed Software and Improvements thereto shall operate
in accordance with the provided Technical Information.
IGF warrants that sole title to the IGF copyright of Licensed Software and
Improvements resides in IGF, and that IGF has full power and authority to enter
into and carry out this Agreement.
IGF shall use its best efforts to promptly correct program errors when such
errors are reported to IGF. IGF will use its best efforts to provide
Improvements to Licensed Software if necessary to repair the error and
eliminate adverse effects on the Customer of the non-conformity.
V. LIMITATIONS AND EXCLUSIONS OF WARRANTIES
1. IGF's warranties do not extend to operation of any hardware configuration,
nor in any operating environment (e.g., operating system)
2. IGF's warranties do not apply to:
a) Any copy of the Licensed Software that is re-engineered by any person other
than IGF; nor
b) Malfunctions resulting from use of the Licensed Software other than in
accordance with the most current Technical Information provided by IGF; nor
c) Bugs or irregularities caused by defects, problems, or failures of hardware
or software not provided by IGF; nor
d) Bugs or irregularities caused by gross negligence of Customer or any other
person except IGF.
3. EXCEPT FOR IGF'S WARRANTY THAT THE LICENSED SOFTWARE WILL OPERATE AS DEFINED
IN THE TECHNICAL INFORMATION, IGF EXPRESSLY DISCLAIMS ANY WARRANTY THAT THE
FUNCTIONS PERFORMED BY THE LICENSED SOFTWARE WILL MEET ADDITIONAL CUSTOMER
REQUIREMENTS OR WILL OPERATE IN THE COMBINATIONS THAT MAY BE SELECTED FOR USE BY
CUSTOMER.
THE EXPRESS WARRANTIES AND EXPRESS REPRESENTATIONS SET FORTH IN THIS
AGREEMENT ARE IN LIEU OF, AND IGF DISCLAIMS, ANY AND ALL OTHER WARRANTIES,
CONDITIONS, OR REPRESENTATIONS (EXPRESS OR IMPLIED, ORAL OR WRITTEN), WITH
RESPECT TO THE SOFTWARE SUPPORT MAINTENANCE AGREEMENT, INCLUDING ANY AND ALL
IMPLIED WARRANTIES.
<PAGE>
VI. LIMITATION OF LIABILITY
1. IGF EXPRESSLY DISCLAIMS, AND CUSTOMER AGREES NOT TO ASSERT. ANY LIABILITY
FOR INCIDENTAL, CONSEQUENTIAL, OR SPECIAL DAMAGES ARISING EITHER DIRECTLY OR
INDIRECTLY FROM OPERATION OF THE LICENSED SOFTWARE, INCLUDING BUT NOT
LIMITED TO LIABILITY FOR LOST OR CORRUPTED DATA OF CUSTOMER. IN NO EVENT
SHALL EITHER PARTY BE LIABLE FOR ANY INCIDENTAL, CONSEQUENTIAL OR SPECIAL
DAMAGES ARISING FROM THIS AGREEMENT OR USE OF LICENSED SOFTWARE.
2. IN NO EVENT SHALL IGF BE LIABLE FOR ANY DAMAGES RESULTING FROM LOSS OF DATA
OR USE, LOST PROFITS OR ANY INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES.
NOTWITHSTANDING ANYTHING IN THE AGREEMENT TO THE CONTRARY, IGF'S ENTIRE
LIABILITY TO CUSTOMER FOR DAMAGES OR LOSSES SHALL NOT EXCEED THE AMOUNT PAID
BY CUSTOMER UNDER THE AGREEMENT PRIOR TO SUCH DAMAGE OR LOSS UP TO A MAXIMUM
OF THE THEN CURRENT APPLICABLE YEARLY MAINTENANCE FEES FOR THE SOFTWARE.
VII. TERM AND TERMINATION
1. Except as otherwise provided herein, this Agreement shall commence on the
Effective Date and continue for a period of 12 months. Automatic renewal is
assumed.
2. Upon termination of this Agreement:
a) Neither party shall have any further obligation to perform any duties
hereunder.
b) If this Agreement is terminated by IGF prior to the end of any year for which
an annual fee for maintenance and support has been paid by Customer, IGF
shall refund to Customer a pro rata portion of said annual fee corresponding
to the unexpired portion of that year.
VII. FEES
1. Payments shall be made according to the terms and conditions defined in
Attachment A.
2. The fees stated in Attachment A are only in effect for the initial term of
the Agreement. Standard Software Maintenance Services fees may vary from year
to year.
3. Unless otherwise specified, payment for Maintenance and Support Services
shall begin thirty (30) days after installation and continue to be due every
thirty (30) days from that date specified. If Customer fails to make payment
on the date such payment is due, written notice shall be sent to the
Customer. Customer shall have ten (10) days
<PAGE>
in which to make payment, Following this grace period, IGF many
discontinue services until Customer has remedied the delinquency. Any
past due payments shall be subject to late fees equal to 1.5% per month.
IX MISCELLANEOUS PROVISIONS
ASSIGNMENT. Neither this Agreement nor any interest herein may be assigned, in
whole or in part, by Customer without prior written consent of IGP, except that,
without securing such prior consent, Customer may assign this Agreement to any
acquirer of substantial all of the business of such party to which the subject
matter hereof relates, or to any affiliate or successor must assume in writing
all obligations herein.
ESCROW. IGF will escrow source code at the Customer's expense for service only,
not to enhance or develop the licensed product in the event IGF should go out of
business.
CONSTRUCTION, APPLICABLE LAW AND PLACE OF PERFORMANCE. This Agreement shall be
deemed to be mad and entered into IGF should go out of business.
NOTICE. All notices, statement, and reports required or permitted by this
Agreement shall be in writing and deemed to have been effectively given and
received five (5) days after the date of dispatch by certified or registered
mail, postage prepaid; or other courier service; and in the case of teleicopied
notice on the date that confirmation is sent by the receiving party to the
sending party addressed as follows:
<PAGE>
WAIVER. The waiver of a default hereunder by one party may be effected only by
written acknowledgement signed by the other party and shall constitute a waiver
of any other default. The failure of either party to enforce any right or remedy
for any one default shall not be deemed a waiver of said right or remedy if the
default persists of if future defaults are committed, nor shall such failure in
any way affect the validity of this Agreement of any part hereof.
INDEPENDENT PARTIES. Nothing in this Agreement shall be deemed to constitute,
create, give effect to or otherwise recognize a partnership, joint venture or
formal business entity of any kind between the parties hereto and the rights and
obligations of the parties shall be limited to those expressly set forth herein.
ENTIRE UNDERSTANDING. This written instrument constitutes the entire
understanding and agreement between the parties with respect to the subject
matter hereof, integrates all prior understandings and agreements with respect
thereto, and shall not be varied, amended, or supplemented except in writing of
event or subsequent date, executed by the parties.
IN WITNESS WHEREOF, the parties hereto have executed this AGREEMENT as of 23
RD day of February 2000.
Intercapital Global Fund, Ltd. Netforfun.Com Inc.
Signature: /s/Sandy J. Masselli Signature: /s/John Bentivaglio
Name: Sandy J. Masselli Name: John Bentivaglio
Title: Chairman Title: Senior Vice President & Director
Date: 2 Mar 2000 Date: March 21, 2000
<PAGE>
Initials: /s/ [ILLEGIBLE]
ATTACHMENT A
FEES FOR SERVICES:
- --------------------------------------------------------------------------------
| Description | Individual Price |
- --------------------------------------------------------------------------------
| Maintenance and Support Services as | $15,000.00 per month |
| outlined in section II of this agreement | |
| | |
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT 10.12
Summerhill Gaming Limited
Devonshire House
Queen Street
Nassau, The Bahamas
March 24, 2000
Intercapital Global Fund, Ltd.
1411 Peel Street, Suite 500
Montreal, Quebec, Canada H3A 1S5
Re: Debt to Equity Conversion
Gentleman:
This letter shall confirm our agreement with you that as of December 31,
1999, all of Intercapital Global Fund, Ltd.'s ("IGF's") outstanding debt (the
"SGL Debt") to Summerhill Gaming Limited ("SGL") under the Revolving Credit Note
dated May 5, 1999 (the "SGL Note") and under the Amended and Restated Purchase
Agreement dated May 5, 1999 (the "SGL Agreement") in respect of the sale by IGF
to SGL of a 50% ownership interest in the slotsvegas online casino, which SGL
Debt amounted to $518,082.86 in the aggregate as of December 31, 1999, shall be
converted into 1,671,235 shares of common stock (the "TE Shares") of Total
Entertainment Inc. ("TE") as of December 31, 1999 based on the market price of
$0.31 per share of TE's common stock at such date.
We agree that the foregoing debt to equity conversion (the "Conversion")
was calculated in accordance with the attached "Schedule of Conversion of
Summerhill Payables into Capital Stock" which is hereby approved by SGL and
incorporated by reference herein.
Upon our receipt of the TE Shares, we agree that as of December 31, 1999,
the SGL Note shall be cancelled and the SGL Debt shall be extinguished. We
hereby confirm and acknowledge that all of IGF's obligations to SGL under the
SGL Agreement have been assumed by Netforfun.com Inc. pursuant to the Purchase
Agreement dated March 1, 2000 between IGF and Netforfun.
In connection with our receipt of the TE shares we hereby represent and
warrant to IGF as follows:
(a) Securities Acquired for Investment.
----------------------------------
(1) SGL understands that the TE Shares are being offered and sold to
it in reliance
<PAGE>
on specific provisions of federal and state securities laws and that TE is
relying upon the truth and accuracy of the representations, warranties,
agreements, acknowledgments and understandings of SGL set forth herein for
purposes of qualifying for exemptions from registration under the Securities Act
of 1933, as amended (the "Securities Act"), and applicable state securities
--------------
laws.
(2) SGL is an "accredited investor" as defined under Rule 501 of
Regulation D promulgated under the Securities Act.
(3) SGL (x) is and will be acquiring the TE Shares for SGL's own
account, and not with a view to any resale or distribution of the TE Shares, in
whole or in part, in violation of the Securities Act or any applicable
securities laws and (y) has not offered or sold any portion of the TE Shares and
has no present intention or agreement to divide the TE Shares with others for
purposes of selling, offering, distributing or otherwise disposing of the TE
Shares.
(4) SGL (x) is capable of evaluating the risks and merits of an
investment in TE by virtue of its experience as an investor and its knowledge,
experience and sophistication in financial and business matters; (y) recognizes
that SGL's investment in TE involves a high degree of risk; and (z) is capable
of bearing the entire loss of its investment in the TE Shares.
(5) SGL has reviewed TE's Registration Statement on Form 10-SB and
other reports recently filed by TE with the Securities and Exchange Commission.
(6) SGL has had an opportunity to meet with and to ask questions of
TE's officers and directors in connection with its conversion of the SGL Debt
into the TE Shares.
(7) SGL acknowledges that no specific representations or warranties
regarding TE or its prospects have been made to it by any officer or director of
TE or by TE and that SGL is relying solely on its own evaluation in making an
investment in TE.
(b) Exemption from Registration; Restrictive Legend. It is acknowledged
-----------------------------------------------
that the conversion of the SGL Debt into the TE Shares is intended to be exempt
from registration under the Securities Act by virtue of Section 4(2) of the
Securities Act. SGL understands that the TE Shares have not been, and may never
be, registered under the Securities Act; that the TE Shares cannot be sold,
transferred, assigned, pledged or subjected to any lien or security interest
unless they are first registered under the Securities Act and such state and
other securities laws as may be applicable or in the opinion of counsel for TE
an exemption from registration under the Securities Act is available (and then
the TE Shares may be sold, transferred, assigned, pledged or subjected to a
lien, security interest or other encumbrance of any nature whatsoever only in
compliance with such exemption and all applicable state and other securities
laws); and that the following legend will be placed upon the certificate for
such shares of the Common Stock:
2
<PAGE>
THE SALE AND ISSUANCE OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR UNDER THE SECURITIES
--------------
LAW OF ANY STATE OR OTHER JURISDICTION. NEITHER THESE SECURITIES
NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE OFFERED, SOLD,
ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, HYPOTHECATED OR
OTHERWISE DISPOSED OF, UNLESS PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT THE TRANSACTION
THAT IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION UNDER THE
SECURITIES ACT AND ANY APPLICABLE STATE AND OTHER SECURITIES LAWS.
(c) Broker-Dealer Status. SGL is neither a registered broker-dealer nor
--------------------
an affiliate of any member broker-dealer firm of the National Association of
Securities Dealers, Inc.
(d) Compliance with Laws. SGL covenants and agrees, after purchasing
--------------------
the TE Shares and thereby becoming a shareholder of TE, to comply with all
applicable laws with respect to his ownership of the TE Shares.
Sincerely,
SUMMERHILL GAMING LIMITED
By:/S/ Donald Dorfman
---------------------------
Name: Donald Dorfman; Phd.
Title: V.P.
AGREED AND ACCEPTED:
INTERCAPITAL GLOBAL FUND, LTD.
By:/S/ Sandy J. Masselli, Jr.
---------------------------
Sandy J. Masselli, Jr.,
Chief Executive Officer
3
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TOTAL
ENTERTAINMENT INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 DEC-31-1999
<CASH> 30,390 23,865
<SECURITIES> 0 0
<RECEIVABLES> 54,802 73,289
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 101,433 97,154
<PP&E> 83,019 333,545
<DEPRECIATION> 6,226 70,150
<TOTAL-ASSETS> 253,935 697,243
<CURRENT-LIABILITIES> 361,512 975,132
<BONDS> 0 0
0 0
0 0
<COMMON> 55,717 57,388
<OTHER-SE> (163,294) (837,598)
<TOTAL-LIABILITY-AND-EQUITY> 253,935 697,243
<SALES> 169,993 581,543
<TOTAL-REVENUES> 169,993 581,543
<CGS> 0 0
<TOTAL-COSTS> 771,579 1,770,653
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (601,586) (1,189,110)
<INCOME-TAX> 3,900 1,606
<INCOME-CONTINUING> (605,486) (1,190,716)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (605,486) (1,190,716)
<EPS-BASIC> (.01) (.02)
<EPS-DILUTED> (.01) (.02)
</TABLE>
