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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: JUNE 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER: 0-11532
INLAND ENTERTAINMENT CORPORATION
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
UTAH 33-0618806
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
16868 VIA DEL CAMPO COURT, SUITE 200, SAN DIEGO, CALIFORNIA 92127
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
ISSUER'S TELEPHONE NUMBER: (619) 716-2100
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK, $.001 PAR VALUE PER SHARE
(TITLE OF CLASS)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X]
No [ ]
Check if there is no disclosure of delinquent filers in response 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]
State issuer's revenues for its most recent fiscal year: $14,647,460
As of September 18, 1998, the aggregate market value of the voting stock
held by non-affiliates of the registrant (based on the closing sale price of
such stock on such date) was approximately $5,942,230.
State the number of shares outstanding of each of the registrant's classes
of common equity as of the latest practicable date: At September 18, 1998, there
were 4,699,186 shares outstanding of the registrant's common stock, $.001 par
value per share (the only class of common equity).
Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement prepared in connection with the Annual
Meeting of Shareholders to be held in 1998 -- Part III.
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INLAND ENTERTAINMENT CORPORATION
ANNUAL REPORT ON FORM 10-KSB
FOR THE PERIOD ENDED JUNE 30, 1998
TABLE OF CONTENTS
<TABLE>
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PAGE
PART I
<S> <C> <C>
ITEM 1: DESCRIPTION OF BUSINESS................................................................... 1
ITEM 2: DESCRIPTION OF PROPERTY................................................................... 15
ITEM 3: LEGAL PROCEEDINGS......................................................................... 15
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................................... 15
PART II
ITEM 5: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.................................. 15
ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION................................. 16
ITEM 7: FINANCIAL STATEMENTS...................................................................... 23
ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE................................................................................ 39
PART III
ITEM 9: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.................................................... 39
ITEM 10: EXECUTIVE COMPENSATION.................................................................... 39
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................ 39
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................ 39
ITEM 13: EXHIBITS AND REPORTS ON FORM 8-K.......................................................... 39
SIGNATURES................................................................................................ 43
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
Inland Entertainment Corporation, a Utah corporation formerly known as
Inland Casino Corporation ("Inland Entertainment" or the "Company"), is a gaming
consulting company. Inland Entertainment is a successor to a corporation
organized in June 1994, also known as Inland Casino Corporation, a Delaware
corporation ("ICC II"), which was formed to consolidate various gaming related
entities which were owned by the shareholders of ICC II. Effective May 22, 1995,
ICC II was merged into Twin Creek Exploration Co., Inc., a Utah corporation and
a public reporting company ("Twin Creek") which was incorporated in March 1980.
Immediately prior to such merger, substantially all of Twin Creek's assets were
distributed to its shareholders. Upon completion of the merger, Twin Creek's
name was changed to Inland Casino Corporation.
Inland Entertainment's primary business has been providing consulting
services for gaming operations under agreements with Native American Tribes. The
Company has provided services for its principal client, the Barona Group of
Capitan Grande Band of Mission Indians (the "Barona Tribe"), at the Barona
Casino on the Barona Tribe's reservation land located approximately 30 miles
east of San Diego, California, since 1991.
During the fiscal year ended June 30, 1998 ("Fiscal 1998"), the Company
began actively researching and evaluating business opportunities in addition to
Indian gaming. The Company has pursued Internet related opportunities including,
on-line marketing, web site development, electronic commerce applications and
strategic Internet related consulting. The Company has both gaming and
non-gaming Internet clients. In March 1998, the Company established a
wholly-owned foreign subsidiary, Worldwide Media Holdings N.V., a Curacao,
Netherland Antilles corporation ("WMH") to provide comprehensive marketing,
advertising, technical and translation services for Internet related businesses,
including three international Internet casinos. WMH is responsible for all
marketing costs and is paid a fee for its services. In August 1998, the Company
purchased Cyberworks, Inc., a California corporation ("Cyberworks"), a web site
developer and on-line marketing company with existing clients in gaming and
non-gaming industries to further the Company's strategic growth into the on-line
marketplace. Cyberworks will operate as a wholly-owned subsidiary of the
Company.
The Company's executive offices are located at 16868 Via Del Campo Court,
Suite 200, San Diego, California 92127. Its telephone number is (619) 716-2100.
BUSINESS STRATEGY
In the fiscal year ending June 30, 1999 ("Fiscal 1999"), the Company intends
to (i) continue its long-standing relationship with the Barona Tribe by
providing consulting services to it in connection with the Tribe's operation of
the Barona Casino, (ii) develop and expand the business of Cyberworks, and (iii)
continue to develop its marketing and consulting business related to on-line and
Internet gaming.
INDIAN GAMING
OVERVIEW. Since 1991, the Company has provided consulting services to
several Native American Tribes, including its principal client, the Barona
Tribe. The Company's revenues have been primarily attributable to fees earned
under agreements with the Barona Tribe. The Company provides consulting services
to the Barona Tribe at the Barona Casino. The Barona Casino consists of the
"Barona Big Top," a turn-of-the-century circus theme casino which includes 1,057
video games, 32 table games, a 1,500-seat bingo parlor, a 240-seat buffet
restaurant and a 150-seat off-track betting facility, which is operated by the
Barona Tribe. The complex exceeds 100,000 square feet and is located on
approximately 15 acres, including parking for approximately 2,000 cars. The
Barona Casino is open 24 hours a day, 365 days a year.
AGREEMENT WITH THE BARONA TRIBE. The Company has provided services to the
Barona Tribe since 1991. On March 27, 1996, the Company entered into a
consulting agreement with the Barona Tribe with an effective date of April 1,
1996 (the "Initial Consulting Agreement"), under a grant of authority from the
Barona Tribe's General Council. In May 1996, the parties recognized that an
inadvertent mistake in the provision relating to consulting fees had been made
and entered into an Amended and Restated Consulting Agreement (the "Amended and
Restated Consulting Agreement"). The Amended and Restated Consulting
Agreement, by its terms,
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relates back to March 27, 1996 and reiterates the April 1, 1996 effective date.
Since March 27, 1996, the Company has provided consulting services to the Barona
Tribe in accordance with the terms of the Amended and Restated Consulting
Agreement. In February 1998, the Company and the Barona Tribe executed
Modification #1 to the Amended and Restated Consulting Agreement (the
"Modification") which extended the initial term to March 31, 2004. Unless
otherwise stated herein, the Amended and Restated Consulting Agreement, as
amended by the Modification, shall be referred to herein as the "Barona
Consulting Agreement" or the "Consulting Agreement."
Pursuant to the terms of the Consulting Agreement, the Company will (i)
consult with and advise the Barona Tribe, members of the Barona Tribal Council
and the Barona Tribal Gaming Commission, (ii) provide technical assistance and
training to the employees and staff of the Barona Casino, and (iii) provide
other services as may be directed by the Barona Tribe in such areas as
organization and administration, finance, planning and development, gaming
activities, internal controls, accounting systems and procedures, engineering
and maintenance, housekeeping, human resources, marketing and advertising,
purchasing, surveillance, security and food and beverage operations.
The Barona Tribe may terminate the Consulting Agreement at any time by (i)
giving nine months' notice to the Company, during which time the Consulting
Agreement will remain in effect, and (ii) paying the Company $475,000 per month
for each month remaining under the initial three-year term. Either party may
terminate the Consulting Agreement for (i) committing or knowingly allowing to
be committed any act of theft or embezzlement; however, theft or embezzlement by
an officer or employee of the Company without the Company's knowledge shall not
be cause for termination of the Consulting Agreement, so long as the Company
repays all sums which may have been stolen or embezzled as soon as the Company
becomes aware of the facts or (ii) committing a material breach of any of the
Company's representations that adversely affects its ability to carry out its
responsibilities under the Consulting Agreement. Remedies for breach include the
resolution of any serious problems with the Company's performance within 10 days
of receipt of notice by the Company, and if the problems are not resolved within
10 days of notice, by the Company's meeting and conferring in good faith with
the Barona Tribal Council or the Barona Tribal Gaming Commission to determine
what remedial action, if any, is necessary. In addition, disputes arising under
the Consulting Agreement and not resolved with the Tribal Council or Tribal
Gaming Commission shall be submitted to binding arbitration before the American
Arbitration Association in San Diego.
For its services, the Company receives a monthly base consulting fee of
$475,000 and may receive additional consulting fees if certain operating levels
are reached by the Barona Casino. Notwithstanding the consulting fees to be paid
under the Consulting Agreement, pursuant to its terms, the Barona Tribe has the
right to draw from the gross revenues of the Barona Casino an annual income
stream at least equal to the distributions received by the Barona Tribe for the
twelve month period ended December 31, 1995. In light of such provision, fees
paid or payable to the Company may be reduced.
The Barona Casino relies extensively on electronic video games, including
video pull-tab games, video poker, video keno, and video bingo (the "video
gaming machines"). The Company does not own any of the video gaming machines.
The Company previously had entered into three leases (each, a "Video Machine
Lease" and collectively, the "Video Machine Leases") for the video gaming
machines on behalf of the Barona Casino. To the extent that the Video Machine
Leases are "collateral agreements" to the Consulting Agreement within the
meaning of IGRA, each Lessor is required to comply with IGRA and its
regulations. To the best knowledge of the Company, none of the Lessors, the
Barona Tribe or the Company have submitted the Video Machine Leases to the NIGC
for its approval as "collateral agreements". If these Leases are "collateral
agreements" and are not approved, the Barona Tribe's present intention is to
enter into other legally permissible agreements which relate to gaming machines
meeting applicable legal requirements. As discussed more fully herein under the
Caption "Regulatory Matters - State Regulation", the Barona Tribe will be
entering into purchase or lease arrangements for the Indian Lottery Games which
are permitted by the terms of the Barona Compact (hereinafter defined). Those
arrangements will be made as soon as such devices are commercially available,
which is not certain at this time.
In connection with providing services to the Barona Tribe and other Indian
gaming clients, the Company has entered into contracts with entertainer/singer
Kenny Rogers and his production company for the use of his services in
promotional events, commercials and performances primarily related to the
promotion of the Barona Casino.
COMPETITION. In its role as a consultant to the Barona Tribe, the Company is
primarily focused on competition to the Barona Casino. The Barona Casino
competes directly with two other casinos in the San Diego area located on Indian
reservations, the Sycuan Band of Mission Indians (the "Sycuan Tribe") and the
Viejas Band of Kumeyaay (Mission) Indians (the "Viejas Tribe"). In addition,
there are a total of 17 Indian tribes in San Diego county, and at least one of
those tribes has announced plans to open casino operations in the near future.
To some extent, the Barona Casino's operations compete with other Indian gaming
operations in the Southern
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California counties of San Diego, Riverside, San Bernardino and Santa Barbara.
In addition, the Barona Casino's operations compete with facilities in Nevada
and Arizona and with the California lottery, on- and off-track wagering, card
club casinos, off-shore cruise ships and other forms of legalized gambling.
Competition is likely to increase as Indian gaming and other forms of gaming
continue to expand.
The Company competes with other consulting and management companies for
casino clients. Certain of the Company's competitors have significantly greater
financial resources than the Company. Currently, gaming management companies
from Nevada have not been active in managing Indian gaming operations in
California. However, certain operators have negotiated agreements with Indian
tribes located in California and it is anticipated that as more tribal-state
compacts are reached, there will be significantly more competition for the
Company from other casino consulting or management companies. In addition, more
Indian tribes may choose to develop and manage their casinos without engaging a
management or consulting company. If and when the Company assists in the
development of any Indian gaming casinos in the future, such new casinos also
may compete with other casinos constructed in the future, including casinos that
are parts of national or regional chains. Such chains or other casino
development or management companies may have greater financial resources and
personnel with more experience than the Company.
Competition in the future for the Barona Casino as well as the Company's
other Native American gaming engagements, if any, also may be affected by (i)
periodic over-building, which can adversely affect patronage levels; (ii)
changes in regional and local market conditions; (iii) changes in regional and
local population and disposable income characteristics; and (iv) changes in
travel patterns and preferences. One consequence of the growth in Indian gaming
has been the increased pressure on state legislatures to allow competitive
gaming activity by non-Indians.
MARKETING AND SALES STRATEGIES. In its role as a consultant to the Barona
Tribe, the Company develops marketing and sales strategies for the Barona
Casino, including innovative promotional programs and focused marketing efforts,
including on-line promotions, to emphasize special events, entertainment, casino
games offered, food specials and special drawings for casino customers. To
promote repeat business, the Company also assists its clients in ensuring a high
level of customer satisfaction and loyalty by providing attentive customer
service in a friendly, casual and value-oriented atmosphere. Although perceived
value attracts casino customers initially, actual value generates customer
satisfaction and loyalty. The Company believes that actual value becomes
apparent during the customer's visit through an enjoyable and high-quality
entertainment experience.
In addition, the Company markets its services as a consultant to the gaming
industry through continuing personal contact with industry and tribal leaders,
media advertising, sponsorships, attendance at industry conferences and
presentations of the Company's qualifications and credentials.
REGULATORY MATTERS. The operation of any type of gaming casino on Indian
land is subject to extensive Federal, state and tribal regulation. The
regulatory environment regarding Indian gaming is evolving rapidly. Changes in
federal, state, or tribal law or regulations may limit or otherwise affect
Indian gaming and could therefore have a material adverse effect on the
operations of the Company.
Federal Regulation
Gaming on Native American Indian reservations is governed by Indian Gaming
Regulatory Act ("IGRA"). One of the Congressional purposes in enacting IGRA was
to provide a statutory basis for the operation of gaming by Indian tribes as a
means of promoting tribal economic development, self sufficiency, and strong
tribal governments; to provide a statutory basis for the regulation of gaming by
an Indian tribe adequate to shield it from organized crime and other corrupting
influences; to ensure that the Indian tribe is the primary beneficiary of the
gaming operations; and to assure that gaming is conducted fairly and honestly by
both the operator and players.
IGRA categorized gaming activities as Class I, Class II and Class III
activities. Class I gaming is defined as social games solely for prizes of
minimal value or traditional forms of Indian gaming engaged in by individuals as
a part of, or in connection with, tribal ceremonies or celebrations. Included
within Class II gaming are (i) bingo (whether or not electronic, computer, or
other technologic aids are used) including (if played in the same location)
pull-tabs, lotto, punch boards, tip jars, instant bingo, and other games similar
to bingo, and (ii) card games that are explicitly authorized by the laws of the
state, or are not explicitly prohibited by the laws of the state and are played
at any location in the state, but only if such card games are played in
conformity with those laws and regulations (if any) of the state regarding hours
or periods of operation of such card games or limitations on wagers or pot sizes
in such card games. Class II gaming does not include (i) any banking card games,
including baccarat, chemin de fer or blackjack, or (ii) electronic or
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electromechanical facsimiles of any games of chance or slot machines of any
kind. Class III gaming means all forms of gaming that are not Class I or Class
II.
The Chairman of the NIGC has the authority to levy and collect appropriate
civil fines, not to exceed $25,000 per violation, against the tribal operator of
an Indian game or a management contractor engaged in gaming for any violation of
any provision of IGRA. The NIGC also may impose federal criminal sanctions for
illegal gaming on Indian Land and for theft from Indian gaming facilities. The
Chairman of the NIGC also has the power to order temporary closure of an Indian
gaming operation for substantial violation of the provisions of IGRA, or of
tribal regulations, ordinances or resolutions approved in connection with the
applicable provisions of IGRA. After a temporary closure order, the Indian tribe
or management contractor involved has a right to a hearing before the NIGC to
decide whether the NIGC will order a permanent closure of the gaming operation.
IGRA provides that an Indian tribe may engage in, or license and regulate,
Class II gaming on Indian lands within such tribe's jurisdiction if (i) such
Indian gaming is located within a state that permits such gaming for any purpose
by any person, and (ii) the governing body of the Indian tribe adopts an
ordinance or resolution which is approved by the Chairman of the NIGC. Net
revenues received by the Indian tribe may not be used for purposes other than to
(i) fund tribal government operations or programs; (ii) provide for the general
welfare of the Indian tribe and its members; (iii) promote tribal economic
development; (iv) donate to charitable organizations; or (v) help fund
operations of local government agencies.
Any Indian tribe which operates a Class II gaming activity and which (i) has
continuously conducted such activity for a period of not less than three years,
including at least one year after 1988; and (ii) has otherwise complied with the
applicable provisions of the IGRA may petition the NIGC for a certificate of
self-regulation. The NIGC will issue a certificate of self-regulation if it
determines that the Indian tribe has, among other items, (i) conducted its
gaming activity in a manner which has resulted in an effective and honest
accounting of all revenues, has resulted in a reputation for safe, fair and
honest operation of the activity, and has been generally free of evidence of
criminal or dishonest activity; and (ii) adopted and is implementing adequate
systems for accounting for all revenues from the activity, monitoring of all
employees and prosecution of violation of its gaming ordinance and regulations.
An Indian tribe may enter into a management contract for the operation and
management of a Class II gaming activity, but the Chairman of the NIGC must
approve the contract.
Unlike Class II gaming, an Indian tribe may only engage in Class III gaming
if it enters into a tribal-state compact with the state in which its gaming will
take place, or agrees to abide by a set of regulatory rules obtained from the
U.S. Secretary of the Interior. Contracts to manage Class III gaming activities
must be approved by the NIGC under rules nearly identical to those applicable to
Class II management contacts. Of particular significance are the statutes and
regulations regarding approval of Class II and Class III management contracts
which place limitations on the amount of any management fee which is based on a
percentage of the operation's net revenues from gaming.
Under IGRA, Indian tribal governments have primary regulatory authority over
gaming on Indian land within the Indian tribe's jurisdiction unless a
tribal-state compact has delegated this authority. Therefore, persons engaged in
gaming activities, including Inland Entertainment, are subject to the provisions
of tribal ordinances and regulations on gaming. Such ordinances and regulations
must be consistent with IGRA and the Indian Civil Rights Act of 1968, and cannot
impose criminal penalties upon non-Indians. However, the civil remedies imposed
by such tribal government regulations, if otherwise valid, will apply to Inland
Entertainment and its employees. IGRA also requires that the NIGC review tribal
gaming ordinances and approve such ordinances only if they meet certain
requirements relating to the ownership, security, personnel background,
recordkeeping and auditing of the tribe's gaming expenses; the use of the
revenues from such gaming; and the protection of the environment and the public
health and safety.
In October 1993, the General Council of the Barona Tribe enacted and adopted
a Gaming Ordinance (the "Ordinance"), authorizing, among other things, Class II
and Class III gaming operations at the Barona Reservation, in accordance with
NIGC regulations. The Ordinance was approved by the NIGC in February 1994. The
Barona Tribe is required by the Ordinance to conduct a background investigation
of each of its key employees and management officials employed by the Barona
Casino, and a report concerning the background investigation and the Barona
Tribe's determination of eligibility of each such individual must be sent to the
NIGC. The Company, its officers, key employees, directors and shareholders
holding 10% or more of the Company's common stock (collectively, "Principals")
are subject to these background investigations. Unless the NIGC has an
objection, an individual may be licensed as a key employee or management
official of the Barona Casino by the Barona Tribe. Any license so granted may be
suspended if the Barona Tribe receives information from the NIGC that an
individual is not eligible for employment. The Barona Tribe
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has licensed all key employees and management officials of the Company and has
completed its investigation of the Principals of the Company. No licenses have
been suspended or revoked.
In furtherance of its responsibilities, the NIGC has issued a series of
formal regulations as well as several informal "bulletins" which address
implementation of IGRA. The NIGC's rules and directives, together with IGRA and
cases decided under it, the tribal gaming ordinance, and the provisions of any
applicable tribal-state compact, provide the regulatory framework for gaming on
the Barona reservation.
IGRA provides that an Indian tribe may enter into a contract for the
management or operation of Class II or Class III gaming activity if such
contract has been submitted to, and approved by, the NIGC. IGRA also prohibits a
management company from operating a casino on Indian land without first having
its management contract approved by the NIGC.
The Chairman of the NIGC (or his designee), after notice and hearing, has
the authority to require contract modifications or may void any contract if he
makes certain findings of violations. In addition, pursuant to the regulations
under IGRA (the "Regulations"), management agreements that have not been
approved by the U.S. Secretary of the Interior or the Chairman of the NIGC in
accordance with the Regulations may be deemed void.
The NIGC does not approve consulting contracts; however the NIGC reviews
such contracts to determine whether they are management or consulting contracts.
If a contract is determined to be a management contract, it is subject to
approval by the NIGC; if determined to be a consulting contract, it is then
forwarded by the NIGC to the Bureau of Indian Affairs (the "BIA") for approval.
Regulations under IGRA incorporate and elaborate upon the contract review
requirements imposed by IGRA. Under IGRA, a management contract can be approved
only after the appropriate federal authority determines that the contract
provides for (i) adequate accounting procedures and verifiable financial
reports, which must be furnished to the tribe; (ii) tribal access to the daily
operations of the gaming enterprise, including the right to verify daily gross
revenues and income; (iii) minimum guaranteed payments to the tribe, which must
have priority over the retirement of development and construction costs; (iv) a
ceiling on the repayment of such development and construction costs; and (v) a
contract term not exceeding five years and a management fee not exceeding 30% of
profits; provided, that the NIGC may approve up to a seven year term and a
management fee not to exceed 40% of net revenues if the NIGC is satisfied that
the capital investment required or the income projections for the particular
gaming activity justifies the larger profit allocation and longer term. No
contract term shall exceed five years, and no fee in excess of 30% of net
revenues may be approved unless the NIGC is satisfied that a "very substantial
capital investment" will be made by the management contractor, in relation to
the size, cost, location and income projections for the project.
Under IGRA, the management company must provide the NIGC with background
information on each interested party, including a complete financial statement
and a description of such person's gaming experience. Such a person also must
agree to respond to questions from the NIGC.
The Regulations also impose detailed requirements for background
investigations of each officer, director, key employee and interested party of
Indian gaming management companies, gaming equipment suppliers and certain
lenders to Indian gaming operations. The NIGC will not approve a management
company and may void an existing management contract if an officer, director,
key employee or an interested party of the management company is (i) an elected
member of the Indian tribal government that owns the facility being managed;
(ii) has been or is convicted of a felony gaming offense; (iii) has knowingly
and willfully provided materially important false information to the NIGC or the
tribe; (iv) has refused to respond to questions from the NIGC; or (v) is a
person whose prior history, reputation and associations pose a threat to the
public interest or to effective gaming regulation and control, or create or
enhance the chance of unsuitable activities in gaming or the business and
financial arrangements incidental thereto. In addition, the NIGC will not
approve a management contract if the management company or any of its agents has
attempted to unduly influence any decision or process of tribal government
relating to gaming, or if the management company has materially breached the
terms of the management contract, or the tribe's gaming ordinance, or if a
trustee, exercising due diligence, would not approve such management contract.
The Regulations incorporate and elaborate upon these requirements and provide
that a management contract shall be terminated if certain persons, who are not
clearly identified, are convicted of any felony or misdemeanor offense after the
contract becomes effective, or if a person has attempted to unduly influence any
decision or process of tribal government.
Even after a management contract has been approved, the NIGC has the
authority to void the contract if an interested party engages in certain
activities, including refusing to respond to inquiries of the NIGC, or, in the
opinion of the NIGC, has a reputation that
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enhances the possibility of unsuitable activities in gaming. Inland
Entertainment's Amended and Restated Articles of Incorporation provide that in
the event that an interested party fails to provide information requested by the
NIGC or otherwise gives it cause to either deny approval of or seek to void a
management contract to which Inland Entertainment is a party, such interested
party shall be required to divest all of Inland Entertainment's stock owned by
him or her within a 90 day period. If the interested party is unable to sell
such stock within this period, Inland Entertainment must repurchase it at a
designated purchase price below the fair market value of such stock. As a public
company, Inland Entertainment will be limited in its ability to regulate who its
shareholders may be. In the event that Inland Entertainment cannot purchase such
shares, whether for financial reasons or because such interested shareholder
refuses to sell his shares to any party, and the NIGC, as a result of such
interested shareholder's actions, denies approval of, or seeks to void the
Consulting Agreement or other agreements, such action by the NIGC would have a
material adverse effect on Inland Entertainment.
In March 1996, the Barona Tribe submitted the Initial Consulting Agreement
to the NIGC. In May 1996, the NIGC (i) determined that the Initial Consulting
Agreement was not a management agreement and, therefore, not subject to NIGC
approval and (ii) forwarded the Initial Consulting Agreement to the BIA who in
July 1997 reviewed the Initial Consulting Agreement and determined that no
further action by the BIA with respect to such Agreement was required. In
January 1997, the Company entered into a settlement agreement with the NIGC
regarding the Company's historical relationship with the Barona Tribe. Under the
terms of the settlement agreement, the NIGC held, among other things, that the
relationship between the Barona Tribe and the Company had benefitted the Barona
Tribe, and that the Company had not violated any law. The Company agreed to
reimburse the NIGC for administrative, investigative and legal expenses in the
aggregate amount of $250,000. In addition, the Company agreed to contribute
$2,000,000 to the Barona Tribe for general improvements on the reservation,
payable in five equal annual installments, commencing in January 1997 (the "NIGC
Settlement Obligation"). The Company will account for the $2,000,000 in payments
as deferred contract costs, which will be amortized over the remaining term of
the Consulting Agreement with the Barona Tribe.
In January 1997, the Company submitted the Amended and Restated Consulting
Agreement to the NIGC. In April 1997, the Company received a letter from the
NIGC questioning whether the Amended and Restated Consulting Agreement was in
fact a management contract. The Company believes that the NIGC will ultimately
determine that the Amended and Restated Consulting Agreement is not a management
contract, based upon (i) the May 1996 and July 1997 determinations of the NIGC
and the BIA, respectively, with respect to the Initial Consulting Agreement,
(ii) the NIGC's findings in the January Settlement Agreement, and (iii) the
actual elements of the relationship between the Barona Casino and the Company.
However, there can be no assurance that the NIGC will determine that the Amended
and Restated Consulting Agreement is not a management contract. If such a
determination is not made by the NIGC, the failure of the NIGC to approve the
Amended and Restated Consulting Agreement could have a material adverse effect
on the business and financial condition of the Company. If the NIGC concludes
that the Amended and Restated Consulting Agreement is not a management
agreement, the NIGC will forward the Amended and Restated Consulting Agreement
to the BIA for its review. To the extent that the BIA determines that its
approval is required, there can be no assurance that such Agreement will be
approved by the BIA, and such failure to approve the Amended and Restated
Consulting Agreement could have a material adverse effect on the business and
financial condition of the Company. The Company is in the process of submitting
the Modification to the NIGC. If the appropriate regulatory approvals, as
discussed above, are not obtained, such failure could have a material adverse
effect on the business and financial condition of the Company. See Notes to
Consolidated Financial Statements, NOTE B -- BARONA CONSULTING AGREEMENT,
herein.
Significant Litigation
On June 30, 1994, the U.S. Attorney's Office of the Southern District of
California ("USAO") announced a verbal understanding with a number of Southern
California tribes, including the Barona Tribe (collectively, the "Southern
District Tribes"), that allowed the Barona Tribe to continue to operate without
expansion of gaming activities subject to certain conditions.
In June 1997, as a result of a recent Supreme Court decision, the Southern
District Tribes acknowledged that certain currently operated video gaming
devices are not within the acceptable/permissible scope of compactible gaming
under then current federal and state law and agreed to the commencement of a
voluntary phase-out plan with the USAO. The phase-out plan commenced in August
1997, with the removal of 6% of each Southern District Tribe's existing video
gaming machines and continued in September 1997 with the removal of another 10%
of each Southern District Tribe's video gaming machines. The USAO stated that
the phase-out plan (i) demonstrated a good faith effort by the Southern District
Tribes to continue to cooperate with the USAO and comply with state and federal
laws, (ii) was necessary in order to minimize the impacts to affected tribal
employees and local negative economic impacts resulting from the reduction in
gaming operations, and (iii) was expected to facilitate negotiations between the
State of California and the
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Southern District Tribes designed to determine the type of machine gaming
permissible (otherwise referred to as "compactible") under federal and state
laws.
In September 1997, the USAO announced that it would defer further decisions
relating to the phase-out plan until (i) the completion of the ongoing compact
negotiations between the Pala Band of Mission Indians (the "Pala Tribe") and
(ii) the establishment of a framework for future negotiations between the Pala
Tribe and the State of California, and the State of California and the other
California Tribes, including those that are presently engaged in gaming.
In March 1998, a tribal-state compact (the "Pala Compact") which approved
certain types of gaming activities was reached between the Pala Tribe and the
State of California. Under the Pala Compact, the Pala Tribe will be permitted to
legally offer for public play, electronic gaming devices which are lottery
based, as well as table games consistent with those permitted in California's
card clubs. On March 13, 1998, the Pala Compact was filed with the U.S.
Secretary of the Interior (the "Secretary of the Interior" or the "Secretary")
and, with certain amendments, such compact was approved by the Secretary in
April 1998. See the discussion regarding the Pala Compact herein under the
caption "State Regulation."
Subsequent to the signing of the Pala Compact, the United States Attorneys
in the four California Districts announced that all Indian tribes conducting
gaming operations must decide on or before May 13, 1998 to either (i) agree to
adopt a form of the Pala Compact or (ii) cease all Class III gaming operations.
In the event a tribe elected to not adopt a form of the Pala Compact, the
Department of Justice stated that it would require such tribe to either cease
all Class III gaming activities or agree to terminate Class III gaming as a
condition precedent to initiating compact negotiations with the State. The State
of California consented to suit from tribes who contend the State has not
engaged in good faith compact negotiations if acceptable provisions have not
been reached after six months of bargaining. If a tribe did not consent to
either adopt the form of Pala Compact or to cease all Class III gaming prior to
compact negotiations, the Department of Justice stated that it would seek
judicial remedies to enjoin such operations.
On May 13, 1998, the Barona Tribe elected not to adopt the Pala Compact. On
May 14, 1998, the USAO announced that it had filed a civil forfeiture complaint
against the electronic gaming machines operated by the Barona Tribe. The
complaint asked that the "gambling machines" be forfeited because they were
being operated by the Barona Tribe in the absence of a tribal-state compact and,
therefore, in violation of federal and state law. The USAO's position was that
without prior negotiation of such a compact, the machines were being operated in
violation of federal and state law. United States Attorney Alan D. Bersin stated
that the USAO, aside from filing the above-referenced suit, would not take any
action against the Barona Casino (including taking possession of the "gambling
machines") until after a hearing by the District Court Judge assigned to the
case. Mr. Bersin also stated that the USAO would raise with the District Court
the propriety of the Barona Tribe's continued possession and use of the gaming
machines pending the resolution of the forfeiture complaint.
On August 12, 1998, the Barona Tribe and the State of California entered
into a tribal-state compact relating to Class III gaming. See the discussion of
such Compact herein under the caption "State Regulation." If the Barona Compact
is filed with the Secretary for approval, based upon statements by the USAO and
the presiding District Court Judge in the above-referenced forfeiture action, it
is likely that the suit will be dismissed without prejudice against the Barona
Tribe. On September 23, 1998, a stipulation and order to dismiss the forfeiture
action was filed by the USAO.
Indian Nation Sovereignty/Barona Tribal Regulation.
Indian tribes are sovereign nations with their own governmental systems. As
such, they enjoy sovereign immunity with respect to most disputes, claims and
demands. However, in the Consulting Agreement there is a limited waiver of
sovereign immunity with respect only to suits by Inland Entertainment to enforce
such agreement. The Company would expect a similar limited waiver provision to
be contained in any other consulting or other agreement that it entered into
with a Native American tribe. The Barona Tribe's governmental system consists of
the Tribal Council and the General Council. The Tribal Council consists of
elected representatives who manage the day-to-day operations of the Barona Tribe
and its land. The General Council consists of all of the adult members of the
Barona Tribe. The Tribal Council and the Chairman of the Barona Tribe supervise
the day-to-day operations of the gaming activities on the Barona Tribe's land.
The Company has undertaken responsibilities as consultants focusing on advising
the Barona Tribe in their management of the Barona Casino. The Company has
worked with the Barona Tribe to suggest and implement policies and procedures
for casino operations to safeguard the assets of the Barona Tribe.
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State Regulation
Pursuant to IGRA, certain electronic gaming activities are permissible only
if agreed upon by State governments and tribal representatives. The document
embodying such an agreement is referred to as a "compact." Compacted gaming must
be consistent with the permissible scope of gaming allowed by state law.
The State of California commenced compact negotiations with the Pala Tribe
in October 1996 to determine the scope of permissible gaming and the
circumstances under which such gaming may be conducted. These negotiations
proved to be critical for the Barona Tribe, as well as other California tribes,
in connection with establishing a framework for future permissible Class III
gaming activities for Indian tribes in California.
In March 1998, the Pala Compact was reached between the Pala Tribe and the
State of California. The Pala Compact limited state-wide the total number of
electronic lottery based machines to 19,900, to be divided equally among the 100
federally recognized tribes in California. Although each tribe is allocated only
199 machines, those tribes choosing not to utilize their allocation may license
it to tribes seeking to accumulate more than the initial per tribe allocation;
however, the maximum number of electronic devices permissible to any one tribe
under the Pala compact was fixed at 975.
Additionally, under the Pala Compact, employees of tribal casinos must be
provided California worker's compensation, unemployment insurance, disability
insurance and guaranteed the right to engage in collective bargaining
activities. Patrons of such facilities will have the right to require binding
arbitration of player disputes. A tribe entering into a compact must carry
public liability insurance and agree to a limited waiver of its sovereign
immunity for settlement of patron injury claims.
Local communities will be given the right to conduct an advisory vote on
whether a Native American gaming facility should be located within that
locality. Although a negative vote will not result in preventing the location of
a gaming enterprise at a specific location, it may prompt negotiations for
different conditions in the compact specific to the local community where the
gaming entity is to be located. Additionally, a tribe with a compact must make
arrangements for mitigation of expenses for environmental, police, fire,
emergency or other local services related to the Pala Compact.
On August 12, 1998, a tribal-state compact was signed between the State of
California and the Barona Tribe (the "Barona Compact" or the "Compact"). The
effect of the Barona Compact is to permit the Barona Tribe to engage in certain
Class III gaming activities within the State of California. The Barona Compact
ended a great amount of uncertainty and concern about the future of gaming
activities at the Barona Casino. To become effective, the Barona Compact must be
approved by the Secretary of the Interior and published in the Federal Register.
The Barona Compact has been submitted to the Secretary for approval and,
pursuant to applicable regulations, the Secretary must approve or reject the
Barona Compact by October 19, 1998. If the Secretary does not affirmatively take
action, the Barona Compact will be deemed approved by inaction. Since the Pala
Compact, which is similar to the Barona Compact, was approved by the Secretary
in April 1998, management expects that the Barona Compact also will be approved.
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A summary of the important provisions of the Barona Compact are discussed
below.
The initial term of the Barona Compact will terminate on January 1, 2009,
with an option to renew the Compact for two additional five year terms upon
written notice of renewal to the Governor prior to the termination date. Such
options may be denied if the Barona Tribe has been found to have engaged in
unauthorized Class III gaming on two or more occasions or has committed
violations of compact terms on five or more occasions. The Barona Compact also
may not be renewed in the event the following conditions subsequent occur: (i)
if slot machines or certain other formerly prohibited forms of Class III gaming
are authorized by legislative enactment, initiative, or judicial decision by any
person for any purpose, or (ii) at least one year before termination of the
Barona Compact, the Governor of California notifies the Barona Tribe of an
intention to not renew, setting out the specific reasons for such decision.
Rather than the electronic machines currently in play, the Barona Casino is
permitted to offer only the Indian Lottery Games which are defined by the terms
of the Barona Compact, which description may be amended from time to time as
these unique lottery-based electronic gaming devices evolve. Indian Lottery
Games are based upon the concept that the patrons are playing against one
another and not the "house", since California prohibits house banked games,
whether electronic or cards. There are two varieties of Indian Lottery Games
permitted in the Compact: (i) Indian Video Lottery Match Game and (ii) Indian
Video Lottery Scratcher Game.
The Barona Compact establishes limitations on Class III Gaming which may
have a tendency to restrict gaming activities or operations. Among those which
are of importance to the Barona Casino are the following: (i) the Barona Tribe
may not operate any Class III gaming in a hotel or a structure which includes a
hotel; (ii) card games, including Class II card games, may not be played in the
same room as that in which other Class III activities are conducted; (iii) no
complimentary alcoholic beverages may be served at a compacted gaming facility;
(iv) gaming may not be the exclusive business activity at any compacted
facility; (v) the Barona Tribe is prohibited from offering credit to any patron
and no other person may extend credit to a patron (payments for gaming
activities must be by cash, check, debit card, credit card or cash equivalents);
(vi) no person under the age of 21 is permitted to play or be present in any
room where Class III gaming is offered, except for access to non-gaming areas of
the facility; and (vii) the Barona Tribe has been allocated 199 electronic
lottery based machines.
The Barona Tribe's allocation of 199 electronic lottery based machines may
be adjusted by acquiring a license for additional machines from other tribes who
do not themselves participate in gaming operations. The Barona Tribe must pay an
established fee of Five Thousand Dollars ($5,000.00) per device per year to the
non-participating tribe, which also will have a maximum of 199 lottery machines
allocated to it. Such licenses may be acquired only by those tribes with
compacted Class III operations. However, the Barona Tribe may not acquire
allocations for electronic lottery machines greater than the number it had on
July 1, 1998, which was 1057 devices. Additionally, if State Legislation is
enacted which establishes Economic Development Zones, the allocated lottery
devices permitted may be reduced by the number of devices representing fifty
percent (50%) of the net income derived from private investments.
The Barona Tribe will be permitted to operate its current 1057 electronic
gaming devices at the Barona Casino for up to six months after the Compact has
been signed if the Indian Lottery Games are not commercially available to the
Barona Tribe. At the present time, there are no such Indian Lottery devices
available to any compacted Indian tribe in California. The device is not similar
in functional capability to any existing electronic gaming device or
conventional slot machine. The time limitation for conversion may be extended if
the Indian Lottery devices are still not certified for operation to the
compacted tribes or are not commercially available by that time. In addition,
these lottery-based electronic devices have not yet been commercially produced
or tested in a public environment. There is no current basis to determine
whether the compact-defined devices will produce an income stream comparable to
those machines currently in play at the Barona Casino. In the event the
lottery-based devices do not produce an income stream consistent with that being
earned by the machines currently in play at the Barona Casino, the resulting
decline in revenue from Barona operations may have a materially adverse impact
on the fees paid to the Company under the Consulting Agreement.
Pursuant to Compact, the State of California and the Barona Tribe must
establish a method for the licensing of all key employees of a gaming entity and
issuing work permits for other service employees. While the Barona Tribe does
not have to be licensed because it is a sovereign governmental entity, the State
Gambling Control Act applies state civil, criminal and regulatory control over
all other persons and entities associated with or potentially associated with
Class III tribal gaming. The Barona Tribe must establish an independent Tribal
Gaming Commission, which will then have primary responsibility for investigation
and regulation of gaming on the reservation. The Barona Tribe established their
own Tribal Gaming Commission two years ago, as well as having established a
Tribal Gaming Ordinance to authorize gaming on the Barona Reservation in 1993,
which was subsequently approved by the NIGC in 1994.
State findings of suitability are granted for only a year and key employees,
tour operators, certain vendors, anyone with an interest in the casino, and
anyone who has significant influence over gaming operations, including Tribal
members, must apply for a license and finding of suitability. Work permits for
other employees of the tribal gaming operations must be obtained from the State
Gaming Control Agency. Such work permits must be renewed annually. Enrolled
members of the Barona Tribe are not required to submit an application for
suitability unless the State of California notifies the Barona Tribe of specific
objections to a particular Tribal member. The Barona Compact provides a "safe
harbor" provision for current key employees of the Barona Tribe's gaming
operations who may have been associated with Class III gaming activities prior
to execution of the Barona Compact. Participation in such operations will not,
in and of itself, be grounds to deny, suspend, or revoke a state determination
of suitability. If other grounds exist, those may form
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an independent basis for a finding of unsuitability. The primary responsibility
for conducting background investigations rests upon the Barona Tribal Gaming
Commission, which must then coordinate its activities with the State Gaming
Control Agency. The Barona Tribe must maintain a list of all its lottery
devices, the shipping information, manufacturer, and serial number of all such
devices. It is not a State or Federal offense to transport or store gaming
devices under an approved compact and if accomplished according to the
guidelines of the compact.
The Barona Compact contains provisions for resolution of patron disputes
regarding gaming activities and claimed winnings. If the Tribal Gaming
Commission cannot resolve the dispute, the matter will then be referred to the
American Arbitration Association for hearing and decision. Arbitration rulings
are final and non-appealable. The Compact also requires the Barona Tribe to
carry public liability insurance with initial limits of Five Million Dollars
($5,000,000) for personal injury and property damage claims. The Barona Tribe is
not required to generally waive its sovereign immunity, but may not invoke
sovereign immunity up to the Five Million Dollar ($5,000,000) liability
insurance limits. This would apply to injury or damage claims which arise from
ordinary negligence actions, as well as certain intentional torts in which the
Barona Tribe may have advance knowledge concerning the propensities of the
employees or agents accused of the misconduct. In no event will the Barona Tribe
be required to waive its sovereign immunity except to the extent of liability
insurance.
The Barona Compact requires that industrial insurance be made available to
employees of the casino and outside agents who are employed to perform work at
the gaming facility. Additional provisions require compliance with the Federal
Occupational Safety and Health Act (OSHA), as well as other California laws
pertaining to safety and health issues for employees. The gaming facility must
comply with California Unemployment, Disability, Withholding Tax, compensation
and working hours provisions, and must open the Barona Tribe's service employees
to bargaining for collective representation of some type. The Barona Tribe
agrees to not interfere with organizational efforts of a union or other entity.
Under the terms of the Barona Compact, State and local criminal laws which
could not generally be enforced on the Barona Reservation may now be enforced in
the same manner as in California generally, except for certain activities at the
gaming facility. Class III gaming operations are exclusively within the province
of Federal law enforcement officers and Federal Courts; however, the Barona
Compact provisions give the State jurisdiction to claim that violations of
certain criminal laws constitute a breach of the Barona Compact. The Compact
also contains provisions which require participation of the Barona Tribe with
local governmental entities and law enforcement officials to share incremental
expenses necessitated by the Class III operations. The Barona Tribe will agree
to mitigate the incremental expenses of (i) significant environmental effects
outside the Barona Reservation; (ii) law enforcement services or other necessary
public services; (iii) compliance with local and county building and safety
standards; (iv) local public health and safety compliance costs, including
planning and activities requiring substantial local involvement and financial
mitigation; and (v) mitigation of compliance with the California Environmental
Quality Act.
The Governor may, at any time, prematurely terminate the Barona Compact
under any of the following circumstances: (i) if at any time there is a
legislative enactment, or constitutional amendment which authorizes slot
machines for any purpose in California; (ii) the Barona Tribe has been found to
have engaged in any prohibited Class III gaming on two separate occasions or
violates the Barona Compact provisions on five separate occasions; or (iii) IGRA
is repealed or a final decision of a Federal Appellate Court rules California
has no obligation to negotiate compacts. The State Legislature may enact
legislation to terminate the Barona Compact, however, the State of California
acknowledges that the Barona Tribe does not agree the Legislature has power to
do so. The Governor must commence negotiations for a new compact if a previous
one is terminated for any reason, except the repeal of IGRA or a Federal Court
ruling pertaining to mandatory negotiation of compacts. Should IGRA be amended
or any California law is enacted which either expands or reduces the scope of
Class III gaming, either party may request the other to negotiate in good faith
to amend the terms of the Barona Compact to reflect those changes.
Federal and State Laws Other than IGRA.
In addition to the regulations imposed by IGRA, tribally owned gaming
facilities on Indian land are subject to a number of other federal statutes,
including the Assimilative Crimes Act, which imposes federal criminal penalties
for the violation of state laws on Indian reservations, and the Johnson Act,
which imposes federal criminal penalties for the operation of mechanical
gambling devices on Indian reservations. If gaming activities on Indian land are
in compliance with IGRA, neither the Assimilative Crimes Act nor the Johnson
Act, nor any state criminal or civil law, will operate to impose penalties on
such activities. However, if gaming activities on Indian land do not comply with
the provisions of IGRA, the provisions of the Assimilative Crimes Act, the
Johnson Act and other
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federal and state law may impose criminal and civil penalties on such
activities. In addition, the Treasury Department has adopted regulations under
the Bank Secrecy Act which apply specifically to Indian gaming operations. These
regulations impose federal criminal penalties for the violation of federal
regulations requiring the reporting of information on unusual or large cash
transactions. The Barona Casino has implemented procedures and programs to
comply with these regulations.
Legislation
In August 1998, the California Legislature passed and Governor Wilson signed
on September 1, 1998 legislation ("AB287") which granted authority to the
Governor to execute the various compacts which had been negotiated between the
State of California and Indian tribes, including, the Barona Tribe. Until the
passage of the bill, there was a certain amount of uncertainty about when the
compacts already signed by Governor Wilson would be valid. However, like all
legislation passed by the California Legislature, AB287 is subject to the
referendum procedure provided in the California Constitution. On September 2,
1998, an interested private party began the referendum process by requesting a
title and summary from the Attorney General of California. On September 23,
1998, the Attorney General released a statement indicating that a referendum
vote to overturn previously approved gaming compacts is being sought. The
procedure requires the filing of approximately 430,000 valid signatures of
voters in support of the referendum petition with the Secretary of State of
California by November 26, 1998. If the Secretary of State certifies that the
required signatures are filed on or before such date, then AB287 will not go
into effect unless and until it is approved by a vote of the general public at
the general election in 2000 or at a special election called by the Governor
prior thereto.
"The Tribal Government Gaming and Economic Self Sufficiency Act of 1998"
(otherwise referred to in California and herein as "Proposition 5" or the
"Initiative"), was proposed by several Indian Nations in California, along with
support from certain California State Legislators. The Initiative was placed on
the November 1998 California General Election ballot. Under Proposition 5, the
Governor is authorized to execute a gaming compact containing the terms
prescribed therein. Execution is a ministerial act, which must be accomplished
within 30 days after written request from a tribe, accompanied by a resolution
of the tribe's governing body. Any federally recognized tribe which has proposed
a tribal-state compact under the terms of IGRA may negotiate with the State for
a compact different than the one set out in the Initiative. The Governor is
authorized to negotiate and execute such a compact without legislative approval
as long as it does not expand the scope of Class III gaming permitted under the
compact set forth in Proposition 5, or require the appropriation of additional
State funds by the legislature. If the legislature acts to pass a law which
expands the scope of permissible gaming authority, such legislation will not be
deemed in conflict with Proposition 5.
The compact shall be deemed agreed to, approved and executed by the State
upon request by a federally recognized Indian tribe, if not executed within 60
days by the Governor. The State agrees to be subject to the jurisdiction of the
Federal Courts for any action brought against it by a federally recognized
Indian tribe. Causes of action may arise from State's refusal to (i) enter into
negotiations for a different compact in good faith, (ii) to enter negotiations
to amend the compact or to negotiate in good faith concerning such amendments,
or (iii) the State's violation of the terms of any tribal-state compact. The
Governor is authorized to execute as a ministerial act any additional documents
necessary to implement the Initiative or any Compact executed in accordance with
it. If Federal law should require a change which affects the procedure to
implement a tribal-state compact, Proposition 5 will be deemed amended to
conform to any modified Federal provisions.
Class III gaming is permitted to any compacted tribal operation, which
includes only lottery based machines in which players are playing against one
another, card games which are not house-banked, Class II games, lottery games,
and simulcasts of horse racing events. No slot machines, roulette, blackjack,
chemin de fer or other house banked games are permitted. However, unlike the
Pala Compact or the Barona Compact, the Initiative would not limit the number of
gaming machine state-wide or per tribe.
The compact described in Proposition 5 will allow tribes and the State to
foster economic development and self-sufficiency consistent with the interests
of IGRA. A participating tribe will agree to make contributions to a trust fund
for tribes less financially secure under a formula set out in the Initiative,
but only until such other tribes begin to operate compacted gaming devices. In
addition, all compacted tribes will contribute to a trust fund at the rate of 2%
of net win each calendar quarter. Disbursement for tribal purpose is equal,
regardless of gaming participation. These contributions will be for those tribes
who, due to their own circumstances, either cannot or choose not to engage in
gaming. The funds shall be used exclusively for education, economic development,
cultural preservation and health care. The participating tribe will also
participate with other compacted tribes in a Statewide trust fund, depositing on
a quarterly basis a sum equal to 3% of the net win of the tribal gaming
terminals. This fund also is administered by a board of trustees, all of whom
shall be from tribes with approved compacts.
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Additionally, a tribe must establish a local benefits grant fund into
which it shall deposit quarterly 1% of the net win from tribal lottery-based
devices. This fund is for local issues and community needs. Within 60 days of
commencing operations, the tribe must initiate a discussion with the State or
local government officials to address the needs, services and mitigation which
could be met by grants of funds from such trust. The requests will be submitted
in writing to a committee comprised of tribal and local government
representatives. No more than 5% shall be annually distributed; in the event no
funds are distributed, the fund shall be carried over to the following year.
The State gaming control agency will be provided with licensing application
information and reports regarding inspection and compliance, may review such,
and enter objections. If the State agency fails to state an objection to a
gaming license application within 90 days, the application is granted; however,
the State agency may revoke or request the tribal agency to suspend or revoke, a
gaming license at any time.
Unlike the Pala Compact and the Barona Compact, Proposition 5 does not
provide for local communities to conduct an advisory vote on whether an Indian
gaming facility should be located within that locality and contains fewer
restrictions on a tribe's right to renegotiate their compact. In light of these
and other differences, passage of Proposition 5 may have an effect on those
compacts currently in existence, including the Barona Compact. At this time,
there can be no assurance that Proposition 5 will be approved by the California
electorate and, if approved, what, if any, effect such approval will have on
existing tribal-state compacts.
The Company expects that legislation involving gaming activities in general
and Indian gaming activities in particular, will continue to be introduced (or
reintroduced, as the case may be) in the United States Congress and in the state
legislatures. It is unclear whether any of these bills will be enacted into law
at any time in the future. Further, it is unclear what, if any, effect these
bills, if passed, will have on the gaming operations of the Barona Tribe or any
other Indian gaming client of the Company.
Conclusion Concerning Indian Gaming Regulation
There are significant civil and criminal penalties associated with operating
gaming activity on the Barona Tribe's Indian Reservation otherwise than in
strict compliance with relevant law. These penalties may be imposed on both the
Barona Tribe and Inland Entertainment and are generally described above. The
imposition of some or all of these sanctions on either the Barona Tribe or the
Company could have a material adverse effect on the operations and financial
prospects of Inland Entertainment. In light of the uncertainties regarding
interpretation and enforcement of certain federal and state laws and
regulations, reported financial information is not necessarily indicative of
Inland Entertainment's future operating results or financial condition.
Management of Inland Entertainment believes gaming activities will continue to
be conducted at the Barona Casino and that such activities are expressly
permitted under IGRA and the laws of the State of California due to the Barona
Compact.
WEB-SITE DEVELOPMENT BUSINESS
In August 1998, the Company acquired Cyberworks, an Internet marketing and
web-site development company. This acquisition is the continuation of Inland
Entertainment's growth into the Internet industry. Cyberworks will function as a
wholly-owned subsidiary of the Company and will continue to provide existing and
new clients with innovative web-site development and on-line marketing
solutions.
INTERNET GAMING
Since March 1998, Inland Entertainment has provided consulting services
related to Internet casinos including the development of casino-style games and
marketing and promoting of Internet casinos through web-site development,
Internet advertising and conventional advertising. Currently, the Company is
providing consulting and marketing services to the following international
Internet casinos: "Casino Australia," the "Kenny Rogers Casino" and "The Good
Luck Club." The Company does not operate any of these casinos and none of the
casinos accept wagers from the United States and its territories. In connection
with its Internet gaming activities, the Company formed Worldwide Media
Holdings, N.V., a wholly-owned subsidiary of the Inland Entertainment ("WHM").
Functions of the Company's Internet business are performed by the Company
directly, through WMH and by the Company through a consulting agreement with
WMH.
SIGNIFICANT AGREEMENTS. In Fiscal 1998, WMH entered into two material
agreements related to Internet gaming. In March 1998, WMH entered into a
Marketing Representative Agreement (the "Marketing Representative Agreement")
with Cyberluck Curacao, N.V. ("Cyberluck") and Bardenac Holding, N.V.
("Bardenac"). Cyberluck is the holder of the Netherlands Antilles gaming license
and is authorized to operate games of chance on the international market via the
Internet. Pursuant to an agreement between Cyberluck and Intertainet Overseas
Licensing Ltd., ("IOL"), the provider of software to Cyberluck, Bardenac was
appointed as the "information provider" on behalf of Cyberluck and is the owner
of "Casino Australia," the "Kenny Rogers Casino" and "The Good Luck Club". Under
the terms of the Marketing Representative Agreement, WMH is responsible for
providing Cyberluck and Bardenac services related to (i) web site design,
engineering and construction including the development of entry and download
instructions and playing strategy pages; (ii) advertising production, design and
placement both on-line and off-line, all directory and search engine
submissions,
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and all banner advertising design, construction and placement; (iii) promotional
items, discounts, "free play" promotions, activities, contests for prizes and/or
money related to the casinos; (iv) all promotional activities of any kind of
description, whether delivered via e-mail notification, on-line banner
advertising, traditional media advertising, or personal and word-of-mouth; and
(v) all customer service activities engaged in to obtain, retain, service and
enhance the playing experience of the end-users in the casinos.
The Marketing Representative Agreement provides for an initial term of five
years commencing March 13, 1998, with a one year automatic renewal subject
to (i) certain termination rights of the parties and (ii) termination of the
Software Agreement (described below). For its services, WMH receives a fee equal
to a percentage of the net profits of each casino (as defined under the
Marketing Representative Agreement). Pursuant to an agreement between the
Company and WMH, Inland Entertainment provides certain consulting, distribution
and marketing services to WMH in connection with WMH's fulfillment of its
obligations under the Marketing Representative Agreement.
In March 1998, WMH also entered into a Software Supply and Support Agreement
(the "Software Agreement") with IOL. Pursuant to the Software Agreement, for an
initial license fee, IOL provides to WMH casino software and related technology,
hardware, and technical and support services related to WMH's services pursuant
to the Marketing Representative Agreement. Under the Software Agreement, WMH is
responsible for soliciting end-users for the software applications and is
obligated to (i) employ its best efforts to market and promote the software of
IOL to prospective end-users; (ii) create, implement and pay for all marketing
and promotional efforts related to marketing and promotion of the software to
prospective end-users; and (iii) pay all fees, charges and costs including
customization fees, additional custom programming services, fees incurred in
connection with regulatory compliance and incidental expenses. The Software
Agreement provides for an initial term of five (5) years commencing March 13,
1998, with a one (1) year automatic renewal subject to certain termination
rights of the parties. The Software Agreement obligates WMH to spend $120,000
per year on marketing services related to the promotion of on-line casinos.
Additionally, there are certain sales targets that the on-line casinos must meet
or the Agreement may be subject to termination by IOL. WMH earns fees based on
the net profits of the on-line casinos adjusted by a reserve established for
potential casino customer charge-backs (i.e. credit card disputes). The net
amount owed to WMH is paid as often as daily by wire transfer and is reconciled
once a month with balances being owed, if any, payable to WMH by the 10th day of
the following month.
COMPETITION. Inland Entertainment competes with other management and
consulting companies in the marketing, promotion and distribution of Internet
casinos and related products. The growth in the number of Internet casinos is a
recent phenomenon. Consequently, there is insufficient information with respect
to developing trends in both marketing strategies and the utilization of outside
consulting companies, such as the Company, in providing marketing and
promotional services to on-line casinos. Other marketing and consulting firms
and on-line casinos may have greater financial resources and personnel with more
experience than Inland Entertainment. Competition in the future also may be
affected by (i) the proliferation in the number of on-line casinos; (ii) changes
in international, national, regional and local market conditions; (iii) growth
and development of licensing and regulatory programs in national and
international markets; (iv) changes in international, national, regional and
local populations and disposable income characteristics; and (v) changes in
Internet technology. Inland Entertainment's clients compete with other forms of
gaming including national and international lotteries, traditional casinos,
sports betting, and horse racing.
Casino Australia, the Kenny Rogers Casino and The Good Luck Club each
operate in a highly competitive gaming industry. Exclusive of the United States
and the Netherlands Antilles, these casinos compete, on a world-wide basis, with
over 100 interactive on-line casinos. The casinos compete with cyber-casinos
with web-site locations in various places around the world, including Antigua,
Dominica, Australia, Austria, Luxembourg and South Africa. Competition is likely
to increase as Internet and other forms of gaming continue to expand.
MARKETING AND CONSULTING STRATEGIES. Inland Entertainment markets its
services as a consultant to the Internet gaming industry and to prospective
gaming end-users through personal contacts with industry leaders, media
advertising, attendance at industry conferences and presentations of the
Company's qualifications and credentials. In its role as consultant, Inland
Entertainment develops marketing and distribution strategies for its clients,
including innovative promotional programs and focused marketing efforts.
Additional services provided by the Company include (i) design, development and
improvement of casino games; (ii) developing web sites, splash pages and banner
ads used in advertising and marketing on the Internet; and (iii) and developing
customer service programs designed to promote repeat business and a high level
of customer satisfaction and loyalty for its clients.
The recent acquisition of Cyberworks constitutes a significant addition to
the consulting and marketing services which the Company provides to its Internet
related clients. As a leader in both Internet marketing and Web site design, it
is anticipated that
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<PAGE> 16
Cyberworks will provide Inland with the enhanced ability to design and develop
software, Web sites, banner ads and advertisements for its Internet gaming
clients and therefore allow the Company to more effectively compete in the
Internet marketplace.
REGULATORY MATTERS. Internet gaming operations in general are subject to the
licensing and regulatory requirements of the jurisdiction which issues the
gaming license and in which the server is located. Unlike traditional,
land-based casino gaming, Internet gaming is a recent phenomenon utilizing
technologies which most jurisdictions and governmental authorities are only now
beginning to address. Consequently, the current regulatory environment regarding
Internet gaming is slowly evolving as jurisdictions become more familiar with
the technical aspects of Internet commerce. While several countries have enacted
laws which permit or allow for the licensing of Internet casinos, few have as
yet developed a regulatory structure for regulation and oversight of Internet
gaming activities. The rapid growth in the number of online casinos and sports
wagering businesses has increased the pressure on national, provincial, state
and local governments to address Internet technologies and commercial activities
including gaming. Consequently, in addition to countries that currently issue
Internet gaming licenses, several jurisdictions have begun to develop more
stringent licensing and regulatory requirements for Internet casinos.
Due to both the nascent stage of Internet technologies and the lack of
legislation, laws, and regulatory structures dealing specifically with Internet
gaming, there has yet to develop any trend in regards to the jurisdictional
treatment of laws related to Internet gaming. In general, legislation in most
countries concerning gambling was enacted prior to the advent of Internet
technologies and was designed to address "traditional" land-based gaming
operations. Unlike traditional gaming activities in which the player must be
physically located in close proximity to the "activity", Internet technologies
allow a player to access the casino site from a computer terminal almost
anywhere in the world. Consequently, the ability of a given country to exercise
jurisdiction over the gaming activity is problematic.
Currently the U.S. Senate is considering enactment of the Internet Gambling
Prohibition Act (S.474), known as the Kyl Bill (the "Kyl Bill".) The Kyl Bill
seeks to expand the application of the Federal Wire Act, 18 U.S.C 1084, to all
forms of gaming over the Internet by making the Act applicable to both bettors
and gamblers and by confirming the Act's extraterritorial application.
Originally, the Wire Act applied to "wire communications" and prohibited the use
of interstate telephone lines to conduct a betting or wagering business. The
Wire Act specifically references "sporting event or contest" and permits a
strong argument that it pertains only to sports-related gambling. While there
are several cases construing the Wire Act, in cases where convictions occurred,
sports betting was the only contested activity. To date, there are no reported
cases in which the Wire Act has been applied to non-sports related gambling
activities. The Kyl Bill would extend the Wire Act's application to all forms of
non-exempt gaming including casino style games. The House of Representatives is
currently considering companion legislation to the Kyl Bill. Passage of the Kyl
Bill would operate to effectively prohibit all forms of casino style gambling
over the Internet by individuals physically located in the United States or any
federal territory. Due to the uncertain nature of this legislation,
clients of the Company and its subsidiaries do not accept wagers from the United
States. Passage of the Kyl Bill would, therefore, have little potential impact
upon the Company.
In May 1998, the Minnesota Supreme Court held that the State of Minnesota
has jurisdiction to press consumer fraud charges against an Internet gambling
site operator in Nevada who "purposefully availed themselves" of the privilege
of doing business in Minnesota by placing information about their services on a
Web page accessible to Minnesota residents. The allegations of consumer fraud
involve representation allegedly made by the defendants that the `sports
betting' services were legal. The state of Minnesota contends that wagering on
sporting events in Minnesota violates state laws prohibiting commercial sports
betting and, consequently, the companies conduct involved false advertising,
deceptive trade practices and consumer fraud. Pending a substantive
determination as to the underlying consumer fraud issues, the case is one
principally concerned with the issue of jurisdiction. Arguably, the case stands
for the proposition that for legal purposes, a Web site which is both accessible
from within a given jurisdiction and seeks to solicit business, or in fact
transacts business, over the Internet in that state, would subject the site
operator to the jurisdiction of that state. Consequently, accepting bets or
wagers over the Internet from residents within a given state would subject the
casino operator to the jurisdiction of the state from which the wager was
accepted. As stated above, due to the fact that clients of the Company and its
subsidiaries do not accept wagers from the United States, the case has little
direct potential impact upon the Company.
Although numerous countries including the Netherlands Antilles, Antigua,
Belize, Costa Rica, Austria and Dominica have enacted legislation licensing
Internet gaming, only a few countries such as Australia and Liechtenstein are
currently in the process of developing comprehensive regulatory schemes dealing
with Internet gaming. Legislation such as Queensland Australia's "Interactive
Gambling (Player Protection) Act of 1998" is designed to provide regulatory
control both within a given jurisdiction (Queensland) as well as outside such
jurisdiction to the extent of the territorial legislative powers of the
government. The impact of Australia's legislation is difficult to estimate
inasmuch as it is still in the process of creating a regulatory scheme as
mandated by the legislation. It is anticipated that the casinos of the clients
of the Company and its subsidiaries will adjust their business practices to meet
regulatory compliance as the circumstances may warrant.
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<PAGE> 17
The growth in Internet technologies and the dynamics of Internet commerce
are such that many legal issues bearing on the propriety of the functions and
services provided by the Company and its subsidiaries are yet to be resolved.
Jurisdictional questions regarding the applicability of a particular country's
gaming and advertising/marketing laws to the Company's activities, including
determinations as to "where" the gaming or marketing activities actually occur,
are outstanding and will be answered as the various countries move forward in
addressing Internet related legal issues. As jurisdictions move to address
Internet related gaming issues there will, in all probability, be significant
civil and criminal penalties associated with operating Internet gaming
activities otherwise than in strict compliance with relevant law and judicial
interpretations thereof. A determination that certain consulting and marketing
activities performed by WMH are impermissible could have a material adverse
effect on the business, operations and financial condition of the Company in
light of financial resources and personnel committed by the Company to this new
business venture. The extent of such findings and the associated loss of
revenue, in the aggregate and over what period of time, are all issues incapable
of accurate resolution at this time. Any government action, inquiry and/or
investigation could have a material adverse effect on the competitive position
of Inland Entertainment in the Internet gaming industry. Until the uncertainties
regarding current and future legislation and regulatory developments and the
interpretation and enforcement of such laws as they relate to Internet gaming
become more clear, reported financial information may not necessarily be
indicative of Inland Entertainment's future operating results or financial
condition. The imposition of any penalties against the Company could have a
material adverse effect on the operations and financial prospects of Inland
Entertainment.
EMPLOYEES
As of June 30, 1998, the Company had 18 full-time employees and 2 part-time
employees.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's executive offices are located in San Diego, California, and
consist of approximately 20,000 square feet under a lease that will expire in
October 2002. Cyberworks' executive offices also are located in San Diego,
California, and consist of approximately 5,100 square feet under a lease that
will expire in June 2000. Management believes that its office space will
accommodate the Company's currently anticipated requirements for the foreseeable
future.
ITEM 3. LEGAL PROCEEDINGS
To the best of management's knowledge, there are no material pending legal
proceedings to which the Company or any of its subsidiaries is a party. The
Company is, however, subject to legal proceedings and claims which have arisen
in the ordinary course of business and have not been finally adjudicated.
Although the Company cannot predict the likely outcome of any pending lawsuit or
claims involving the Company, management intends to vigorously defend, and,
where applicable, prosecute, each matter or case, and believes that their final
outcome will not have a material adverse effect on the Company's financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders of the Company
during the fourth quarter of the fiscal year covered by this Form 10-KSB.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET FOR COMMON STOCK
The common stock of the Company, par value $.001 per share (the "Common
Stock"), trades on the Nasdaq Stock Market as a National Market System Security
under the symbol INLD. The table below reflects the high and low sale prices of
the Company's Common Stock as reported by The Nasdaq Stock Market, Inc. for the
periods indicated. The number of shareholders of record as of September 18,
1998, was 3,208.
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<PAGE> 18
<TABLE>
<CAPTION>
HIGH LOW
FISCAL YEAR 1997
<S> <C> <C>
First Quarter.... $4.13 $2.50
Second Quarter... 4.50 3.25
Third Quarter.... 4.25 3.00
Fourth Quarter... 3.88 2.13
FISCAL YEAR 1998
First Quarter.... $7.13 $2.75
Second Quarter... 6.19 3.75
Third Quarter.... 3.88 2.13
Fourth Quarter... 4.63 2.75
</TABLE>
DIVIDEND POLICY
To date, the Company has not paid any dividends and does not intend to pay
any dividends in the foreseeable future. The Company is not currently restricted
from paying cash dividends. The Company presently plans to reinvest earnings in
order to finance the expansion and development of its business.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW; FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company provides services for gaming operations under consulting
agreements with Native American Tribes. The Company has provided services to the
Barona Tribe since 1991 and is currently providing consulting services to the
Barona Tribe at the Barona Casino under the terms of the Barona Consulting
Agreement. The Company has provided certain personnel, at its expense, to
facilitate the activities at the Barona Casino, and it has entered into
agreements such as leases or other contracts for the benefit of the Barona
Casino in which the Company was the obligor (e.g., leases for gaming equipment,
etc.). See Item 1. "Description of Business -- Indian Gaming -- Agreement with
the Barona Tribe," herein.
In addition to its obligations under the Consulting Agreement, the Company's
consulting activities include assisting the Barona Tribe in arranging financing
to support casino construction projects and monitoring of Indian Gaming
legislative and litigation matters. The financing costs have been recognized as
an asset in the financial statements of the Company, designated as deferred
contract costs, and are being amortized to expense over the remaining life of
the Consulting Agreement through March 2004. The recovery of these deferred
costs is achieved through the fees earned by the Company pursuant to agreements
with the Barona Tribe. However, given the nature of the asset, if the
recoverability is determined not to be probable, the Company will charge to
expense the unamortized portion.
Gaming on Indian land is extensively regulated by Federal, State and Tribal
governments. The present regulatory environment is uncertain because of certain
pending litigation and legislation. Adverse findings for any of the Indian
tribes in any of the pending actions could have a material adverse effect on the
operations of the Company, as would criminal and civil enforcement actions taken
by Federal agencies which could be commenced before the outcome of such
litigation is known. The tribal-state compact signed between the Barona Tribe
and the State of California on August 12, 1998 served to eliminate many
uncertainties, particularly with respect to matters related to Class III gaming.
See Item 1. "Description of Business -- Indian Gaming -- Regulatory Matters",
herein.
The Consulting Agreement with the Barona Tribe has not yet been approved by
the regulatory authorities. If the Consulting Agreement is not approved or is
significantly modified from the standpoint of consulting revenue, such action
would have a material adverse effect on the business and financial condition of
the Company. See Item 1. "Description of Business -- Indian Gaming -- Regulatory
Matters -- Federal Regulation" and Notes to Consolidated Financial Statements,
NOTE B --- BARONA CONSULTING AGREEMENT.
As noted above, any material reduction in fees payable to the Company,
whether as a result of (i) a modification to the Consulting Agreement between
the Company and the Barona Tribe as a result of regulatory compliance
requirements or (ii) weakness in the operations of the Barona Casino, could have
a material adverse effect on the business and financial condition of the
Company, if the Company could not either reduce expenses or increase revenues
from other sources.
In light of the uncertainties regarding the laws related to Indian gaming,
reported financial information is not necessarily indicative of the Company's
future operating results or financial condition.
During Fiscal 1998, the Company has been actively researching and evaluating
business opportunities in addition to Indian gaming. The Company has pursued
Internet related opportunities including on-line marketing, web site
development, electronic commerce applications and strategic Internet related
consulting. In March
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<PAGE> 19
1998, the Company established WMH to assist it in offering marketing and
consulting services to on-line and Internet gaming clients. WMH earns marketing
fees based upon a percentage of the net profits of its on-line casino clients.
The Company's new world-wide Internet gaming marketing venture is in its
development stage and, to date, has a limited operating history upon which
evaluation of the business prospects of this venture can be based. The evolution
of the laws and statutes regarding Internet gaming will have a significant
impact on the Company's Internet gaming-related business. However, due to the
fact that jurisdictions are only now beginning to address these issues, the rate
or direction at which the evolution of such gaming regulations and statutes will
take place is uncertain. Management anticipates that the Company will adjust its
business activities as may be necessary in accordance with the growth and
evolution of Internet related laws and regulations.
On August 27, 1998, the Company acquired Cyberworks, an Internet marketing
and on-line application developer, for an aggregate purchase price, excluding
acquisition costs, of $3,560,000 consisting of $500,000 cash and 750,000 shares
of the Company's common stock, $.001 par value per share. The acquisition will
be accounted for as a purchase. Although not required to be reflected in this
Report because the acquisition occurred after Fiscal 1998 year-end, the
acquisition of Cyberworks will have a material impact on the Company's future
financial statements; accordingly, future financial statements may not be
directly comparable to the Company's historical financial statements.
17
<PAGE> 20
RESULTS OF OPERATIONS
TWELVE MONTHS ENDED JUNE 30, 1997 COMPARED WITH THE TWELVE MONTHS ENDED JUNE 30,
1998
Revenue. Revenue decreased 12.1% from $16,665,350 in Fiscal 1997 to
$14,647,460 in Fiscal 1998, as a result of lower profit margins at the Barona
Casino due to an increase in operating expenses at the facility. The Company's
revenues were primarily attributable to fees earned under agreements with the
Barona Tribe, with the exception of approximately $117,000 in fees received
during Fiscal 1997 from consulting services provided to a tribe in New Mexico
and approximately $190,000 in fees received during Fiscal 1998 from consulting
services provided to a tribe in Oregon and approximately $21,000 in marketing
fees earned during Fiscal 1998 by WMH related to the promotion of on-line
Internet casinos.
Operating Expenses. General and administrative expenses increased 8.0% from
$7,655,214 for Fiscal 1997 to $8,267,403 for Fiscal 1998, resulting primarily
from increases in (i) professional services, both legal and consulting, and (ii)
computer supplies and software costs, in each case, related to the development
of new business opportunities primarily focused on the Internet. Facilities
costs and office expenses also increased due to the Company's relocation of its
corporate offices. The increases were partially offset by decreases in (i)
compensation due to the decrease in full-time personnel, (ii) political
contributions because Fiscal 1998 was not a significant election year, (iii)
charitable contributions, (iv) unreimbursed marketing expenses related to
consulting engagements in the Northwest, (v) business development expenses
related to the pursuit of Indian gaming consulting work, and (vi) the provision
for doubtful accounts as allowances were established to cover anticipated losses
from certain consulting engagements.
Amortization of deferred contract costs decreased 15.4% from $2,756,842 for
Fiscal 1997 to $2,333,516 for Fiscal 1998, as a result of a reduction in
amortization expense during the last half of Fiscal 1998 as a new consulting
agreement was entered into with the Barona Tribe that extended the term of the
contract by an additional 60 months. However, the decrease has been partially
offset by an increase in deferred contract costs resulting from the addition of
the $2,000,000 commitment to the Barona Tribe. See Notes to Consolidated
Financial Statements, NOTE B -- BARONA CONSULTING AGREEMENT.
Other Income and Expense. For Fiscal 1998, interest income was $645,315,
compared to $354,116 for Fiscal 1997. The increase was due to the increase in
the Company's investments and cash equivalents. Interest expense increased from
$320,250 in Fiscal 1997 to $538,040 in Fiscal 1998, primarily as a result of an
increase in notes payable to two major shareholders, including a former director
of the Company, in connection with the repurchase of the Company's common stock.
See Notes to Consolidated Financial Statements, NOTE F -- STOCK
REPURCHASE/LONG-TERM DEBT.
Income Tax Provision. The Company recorded an income tax provision of
$1,760,879 for Fiscal 1998, based on income before income taxes of $4,156,816
for the year, compared to an income tax provision of $2,528,000, based on income
before income taxes of $6,287,160 for Fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of liquidity at June 30, 1998, consisted of
cash of $9,205,502, future revenues to be generated from operations and advances
of future fees under the Barona Consulting Agreement. As of June 30, 1998, the
Company had no credit facility. The Company finances its operations through cash
provided by its operations and advances of future fees, all (in the case of
future fees) or substantially all (in the case of cash provided by operations)
derived from agreements with the Barona Tribe. The Company believes that these
sources of liquidity will be sufficient to meet the Company's operating and
capital requirements for the foreseeable future.
During Fiscal 1998, the Company's unrestricted cash position increased
$1,201,424 from the June 30, 1997 balance of $8,004,078, to $9,205,502 at June
30, 1998. The increase was provided by net cash generated by operating
activities of $5,451,622 during the period and reduced by the use of cash for
financing activities of $1,084,857 and investing activities of $3,165,341.
Deferred income taxes decreased $142,201 as the amortization of deferred
contract costs for tax purposes exceeded amortization of the costs for financial
statement purposes during Fiscal 1998. This was partially offset by increases
due to the capitalization for tax purposes of losses incurred by WMH as well as
unearned compensation related to the granting of nonemployee stock options. See
Notes to Consolidated Financial Statements, NOTE G -- INCOME TAXES.
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<PAGE> 21
Compensation of $142,825 represents the fair market value for services
received from various consultants who were granted stock options during Fiscal
1998.
Accounts payable and accrued expenses increased $174,957 compared to Fiscal
1997 year-end primarily as a result of accrued payables recorded for WMH and
increases in accrued interest on notes payable issued in connection with
repurchases of common stock.
Deposits and other assets increased $301,323 compared to Fiscal 1997
year-end primarily related to the capitalized costs of software license and
support agreements.
Prepaid expenses and other current assets increased $91,955 compared to
Fiscal 1997 year-end primarily related to the purchase of software training and
software maintenance support.
From the inception of the Company, the Company's most significant
expenditure has been the funding of deferred contract costs related to
expansion of the facilities at the Barona Casino. The Company has received
advances against future fees from the Barona Tribe to assist in financing such
activities. Under the current relationship with the Barona Tribe, rather than
the Company committing its own funds to develop facilities at the Barona Casino,
the Company acts as an advisor to the Barona Tribe with respect to finding
sources of financing to further develop the Barona Casino. Accordingly, the
deferred contract costs have decreased and are not expected to be incurred in
the future. As in the past, the Barona Casino and all of the related facilities
are capital improvements upon land that belongs to the Barona Tribe. As such,
the Company has no ownership in any of the improvements to such land. All such
improvements belong to the Barona Tribe.
The decrease in net deferred contract costs from approximately $5,843,000 at
June 30, 1997 to approximately $3,855,000 at June 30, 1998, resulted from
amortization of approximately $2,334,000, partially offset by a $346,000
increase in deferred contract costs financed by the use of $116,000 in cash flow
and $230,000 in long-term advances of future fees from the Barona Casino during
the same period. At June 30, 1998, outstanding advances of future fees from the
Barona Casino totaled approximately $2,597,000. Advances do not bear interest
and are due on demand. Debt at June 30, 1998 included $1,200,000 due to the
Barona Tribe related to the NIGC Settlement Obligation of which $400,000 is
currently payable.
Cash flows used in investing activities for Fiscal 1998 includes net
investments in fixed assets of $1,040,163 which consisted primarily of tenant
leasehold improvements at the new corporate headquarters facilities and computer
software and hardware related to the Company's online gaming ventures.
Short-term investments of approximately $1,877,000 is comprised of
Euro-dollar time deposits, commercial paper, and banker's acceptances with
maturities ranging from three months to five months, earning interest at rates
ranging from 5.4% to 5.6%.
Cash flows used in financing activities include approximately $620,000 for
repayment of a promissory note to a former executive officer, director and
principal shareholder for the repurchase of shares of common stock.
Additionally, a $400,000 payment was made pursuant to the NIGC Settlement
Obligation. (See Notes to Consolidated Financial Statements, NOTE F - STOCK
REPURCHASE/LONG-TERM DEBT 2. NIGC Settlement Obligation.) During Fiscal 1998,
the Company expended approximately $132,000 in loans made to employees and
expended approximately $106,000 in loans to third parties, in part, as
investment opportunities.
Cash flows provided by financing activities of approximately $174,000 is a
result of the exercise of 69,638 stock options during Fiscal 1998.
From June 1996 to May 1997, the Company provided consulting services to the
Klamath and Modoc Tribes and the Yahooskin Band of Snake Indians (collectively,
the "Klamath Tribes"). The Klamath Tribes constructed the Kla-Mo-Ya Casino near
Chiloquin, in south central Oregon, a gaming facility funded by revenue bonds
issued by the Klamath Tribes. In connection with such bond financing, the
Company has a net investment of $464,320 in revenue bonds with a principal face
amount of $500,000. In addition, as a condition of the bond financing, the
Company agreed to hold the bonds for a five-year period. Pre-opening costs and
expenses of approximately $1.5 million were financed by loans made pursuant to a
third-party bank credit agreement with the Klamath Tribes. The Company pledged a
certificate of deposit for $1,518,000 as collateral for such loans. If the
Klamath Tribes are unable to pay its obligations, the Company may lose all or a
portion of its investment in the revenue bonds it purchased and its certificate
of deposit
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<PAGE> 22
pledged as collateral for bank loans to the Klamath Tribes, which could have a
material adverse effect on the financial condition of the Company.
Restricted cash and other investments of approximately $2,115,000 is
comprised of a bank certificate of deposit of $1,518,000 pledged as collateral
by the Company to secure loans made pursuant to a bank credit agreement with the
Klamath Tribes in connection with the development of the Kla-Mo-Ya Casino and
the Company's net investment of approximately $464,000 in revenue bonds issued
by the Klamath Tribes. Additionally, the Company issued an irrevocable letter of
credit for $133,000 to satisfy the terms of the corporate office lease
agreement. Such letter of credit will automatically renew on an annual basis
until October 31, 2002 unless canceled by the lessor. See Notes to Consolidated
Financial Statements, NOTE C -- RESTRICTED CASH AND OTHER INVESTMENTS.
WMH has entered into a long-term contract which obligates it to spend
$120,000 a year for marketing services related to the promotion of on-line
casinos. The Company has entered into or is in the process of entering into
other miscellaneous short-term contracts for consulting services with
commitments to vendors totaling approximately $445,000 as of June 30, 1998. One
of the agreements includes terms for profit-sharing with respect to one of the
virtual casinos marketed by WMH. Estimates of such costs to the Company are not
known at this time. See Notes to Consolidated Financial Statements, NOTE H --
COMMITMENTS AND CONTINGENCIES.
FORWARD-LOOKING STATEMENTS AND CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Included in Item 1. "Description of Business," this Item 6. "Management's
Discussion and Analysis or Plan of Operation," and elsewhere in this Report are
certain forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 reflecting the Company's current expectations.
Although the Company believes that its expectations are based on reasonable
assumptions, there can be no assurance that the Company's financial goals or
expectations will be realized. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company, or industry results, to be
materially different from future results, performance or achievements expressed
or implied by such forward-looking statements. Numerous factors may affect the
Company's actual results and may cause results to differ materially from those
expressed in forward-looking statements made by or on behalf of the Company. The
Company assumes no obligation to update or revise any such forward-looking
statements or the factors listed below to reflect events or circumstances that
may arise after this report is filed, and that may have an effect on the
Company's overall performance.
O DEPENDENCY ON REVENUES FROM THE BARONA CASINO
The Company historically and currently has derived substantially all of
its income from services provided to the Barona Tribe. While the Company is
taking steps to diversify its business activities and resulting revenues,
those activities are producing revenues significantly lower than revenues
provided from the Company's services to the Barona Casino. Accordingly, any
material reduction in fees payable to the Company, whether as a result of
(i) market acceptance of the new Indian Gaming Lottery devices; (ii)
decreased operating profits due to machine device licensing fees to be
incurred by the Barona Casino under the terms of the Barona Compact in
order to operate at a level of 1,057 machines; (iii) a modification to the
Consulting Agreement between the Company and the Barona Tribe as a result
of regulatory compliance requirements; (iv) weakness in the operations in
the Barona Casino or (v) otherwise, could have a material adverse affect on
the business and financial condition of the Company, if the Company could
not either reduce expenses or increase revenues from other sources (See
"Item 1. Description of Business -- Indian Gaming -- Regulatory Matters --
State Regulation").
O THE BARONA CONSULTING AGREEMENT
Appropriate regulatory authorities have not yet approved the
Consulting Agreement. If the Consulting Agreement is not approved or is
significantly modified from the standpoint of consulting revenue, such
action would have a material adverse effect on the business and financial
condition of the Company. See Notes to Consolidated Financial Statements,
NOTE B -- BARONA CONSULTING AGREEMENT.
20
<PAGE> 23
O EXTENSIVE REGULATORY ENVIRONMENT RELATING TO INDIAN GAMING
Gaming on Indian land is extensively regulated by Federal, State and
Tribal governments. Class III gaming on Indian lands in California has been
subject to much uncertainty and great risk due to the nature of the IGRA
and various cases which have emanated from it since 1988. On August 12,
1998, the Barona Tribe and the State of California entered into a
tribal-state Compact relating to Class III gaming (the "Barona Compact").
The Barona Compact was submitted to the Secretary of the Interior on
or about September 3, 1998 for the Secretary's approval, a requirement for
effectiveness of the Barona Compact. Because a similar compact to the
Barona Compact has been recently approved by the Secretary, management
expects that the Secretary will approve the Barona Compact. If approved,
the effect of the Barona Compact is to allow the Barona Tribe to engage in
Class III gaming which California permits within the State. Approval of the
Barona Compact will eliminate a great degree of uncertainty with respect to
the Federal and State regulatory system and enforcement procedures related
to Indian gaming. If the Secretary does not approve the Barona Compact, the
legal uncertainties relating to permissible operations of gaming activities
on Indian lands will persist; however, the Barona Tribe will be in a much
better position to articulate the scope of permissible gaming activities at
the Barona Casino.
The Indian Lottery Games detailed in the Barona Compact are an unknown
factor and untested by the competitive environment of the casino floor.
These devices are vastly different from traditional slot machines such
as those played in Nevada, Atlantic City and certain other gaming
environments. Traditional slot machines are house banked, usually operate
with a pull of the handle (regardless of the random number computer which
really selects the winning combination), require coin, currency or cash
equivalent into the machine, and winners are paid in coin or currency. The
Indian Lottery Games will allow coin, currency, debit cards or money
equivalent into the machines, but combine money from the players into a
prize pool to pay winners, do not allow handles, do not permit coin pay
out, but demand a voucher for redemption by a cashier, and mandate the
computers which control the video lottery terminals to be not only separate
from one another, but remote from the gaming facility.
Due to the differences in operational characteristics between
traditional Class III machines and new lottery based machines, it is
unknown whether the typical Barona Casino patron will adapt to these unique
devices. Since field testing has not been done, there is no data from which
projections may be drawn. The lottery devices will be permitted to display
information on the video terminal in an entertaining manner, but the speed
of play and confirmation of selection required in the approved devices may
not generate the same volume of play as previous machines. If there is a
corresponding decrease of gross revenue, that result may be reflected in
diminished consulting fees to Inland Entertainment, although any such
projection is unknown at this time.
O UNCERTAINTIES CONCERNING INTERNET GAMING
The Company's new business venture to market world-wide Internet gaming
is in its start-up phase and, to date, has no operating history upon which
an evaluation of the business prospects can be based. Many of the laws and
regulations concerning the regulation of the business of Internet gaming in
the United States and in other countries are currently being developed. The
evolution of the laws and statutes regarding Internet gaming will have a
significant impact on the Company's Internet gaming business. It is not
known at what rate or direction the evolution of such gaming regulations
and statutes will take place. The Company is competing with other entities,
some of which have been in the market longer than the Company. In addition,
certain current competitors and potential future competitors have, or may
have greater resources than the Company to devote further technologies and
new product developments to the development of Internet gaming. There can
be no assurance that existing or future competitors will not develop or
offer technologies that provide significant economic, technological,
creative or strategic advantages over those offered by the Company. The
Company's future success in the Internet gaming field is dependent on the
evolving regulatory and competitive environment. There is no assurance that
the Company's present and contemplated services provided to "Internet
gaming casinos" will achieve or maintain sufficient commercial acceptance,
or if they do, that regulatory developments will not diminish the full
economic potential of such virtual gaming sites.
21
<PAGE> 24
O VOLATILITY OF STOCK PRICE
The trading price of the Company's Common Stock has been, and will
likely continue to be, subject to wide fluctuations because of Indian
gaming regulatory developments, quarterly variations in the Company's
operating results, announcements of new products or business activities by
the Company or its competitors, general market fluctuations, and other
events and factors. These factors, coupled with the small public float,
have in the past and could in the future result in wide fluctuations in the
market trading price.
O INFLATION
To date, inflation has not had a material impact on the Company's
financial condition or its results of operations.
O YEAR 2000 COMPLIANCE
Many of the world's computer systems currently record years in a
two-digit format. Such computer systems will be unable to properly
interpret dates beyond the year 1999, which could lead to business
disruptions in the U.S. and internationally (the "Year 2000 issue"). The
potential costs and uncertainties associated with the Year 2000 issue will
depend on a number of factors, including software, hardware and the nature
of the industry in which the Company and its Subsidiaries operate.
Additionally, companies must coordinate with other entities with which they
electronically interact, such as customers and creditors.
The Company and its subsidiaries are in the process of evaluating the
full scope and related costs to insure that their systems continue to meet
their internal needs and those of their customers. Anticipated costs for
system modifications will be expensed as incurred and are not expected to
have a material impact on the Company's consolidated results of operations.
However, the Company has not measured or inquired as to the impact that the
Year 2000 issue will have on the vendors, major suppliers, customers and
other parties with which the Company and its subsidiaries conduct business.
If it is determined that any of the Company's or its subsidiaries' vendors,
major suppliers, customers or other parties with which the Company or its
subsidiaries conduct business, has an issue with Year 2000 compliance, the
Company will pursue alternative business relationships to minimize the
impact, if any, that such a relationship(s), will have on the Company and
its subsidiaries' operations.
22
<PAGE> 25
ITEM 7. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Certified Public Accountants.............................. 24
Financial Statements:
Consolidated Balance Sheet -- June 30, 1998................................... 25
Consolidated Statements of Operations -- Years Ended June 30, 1998 and
1997......................................................................... 26
Consolidated Statement of Shareholders' Equity -- Years Ended June 30,
1998 and 1997................................................................ 27
Consolidated Statements of Cash Flows -- Years Ended June 30, 1998 and
1997........................................................................ 28
Notes to Consolidated Financial Statements.................................... 29
</TABLE>
23
<PAGE> 26
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders of
Inland Entertainment Corporation
San Diego, California
We have audited the accompanying consolidated balance sheet of Inland
Entertainment Corporation as of June 30, 1998, and the related consolidated
statements of operations, shareholders' equity and cash flows for the years
ended June 30, 1998 and 1997. These financial statements are the responsibility
of the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 Inland
Entertainment Corporation as of June 30, 1998, and the consolidated results of
its operations and its consolidated cash flows for the years ended June 30, 1998
and 1997, in conformity with generally accepted accounting principles.
/s/ GRANT THORNTON LLP
Los Angeles, California
August 7, 1998
24
<PAGE> 27
INLAND ENTERTAINMENT CORPORATION
CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
ASSETS
<TABLE>
<CAPTION>
CURRENT ASSETS:
<S> <C>
Cash and cash equivalents......................................... $ 9,205,502
Short term investments............................................ 1,876,667
Accounts receivable............................................... 51,644
Prepaid expenses and other current assets......................... 150,024
-----------
Total current assets...................................... 11,283,837
NONCURRENT ASSETS:
Restricted cash and other investments............................. 2,115,320
Employee and other receivables due after one year................. 478,756
Property, plant and equipment, net................................ 1,023,620
Deferred contract costs, net...................................... 3,855,427
Deferred taxes.................................................... 127,982
Deposits and other assets......................................... 388,613
-----------
Total noncurrent assets................................... 7,989,718
Total assets.............................................. $19,273,555
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Advances of future consulting fees -- Barona Casino............... $ 2,596,930
Current portion of long-term debt................................. 400,000
Accounts payable and accrued expenses............................. 1,150,380
Income taxes payable.............................................. 228,344
-----------
Total current liabilities................................. 4,375,654
LONG-TERM DEBT, LESS CURRENT PORTION................................ 8,300,000
-----------
Total liabilities......................................... 12,675,654
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value, 100,000,000 shares authorized
and 3,924,186 shares outstanding............................... 3,924
Retained earnings................................................. 6,683,977
Deferred compensation............................................. (90,000)
-----------
Total shareholders' equity................................ 6,597,901
-----------
Total liabilities and shareholders' equity................ $19,273,555
===========
</TABLE>
The accompanying notes are an integral part of this statement.
25
<PAGE> 28
INLAND ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30,
<TABLE>
<CAPTION>
1998 1997
------------ ------------
REVENUES:
<S> <C> <C>
Barona Casino............................................ $ 14,436,000 $ 16,547,500
Other.................................................... 211,460 117,850
------------ ------------
14,647,460 16,665,350
------------ ------------
OPERATING EXPENSES:
General and administrative expenses...................... 8,267,403 7,655,214
Amortization of deferred contract costs.................. 2,333,516 2,756,842
------------ ------------
10,600,919 10,412,056
------------ ------------
Operating profit........................................... 4,046,541 6,253,294
OTHER INCOME AND (EXPENSE):
Interest income.......................................... 648,315 354,116
Interest expense......................................... (538,040) (320,250)
------------ ------------
110,275 33,866
------------ ------------
Income before income taxes................................. 4,156,816 6,287,160
Income tax provision....................................... 1,760,879 2,528,000
------------ ------------
NET INCOME................................................. $ 2,395,937 $ 3,759,160
============ ============
Earnings per share - basic................................. $ .62 $ .67
============ ============
Earnings per share - diluted............................... $ .54 $ .66
============ ============
Shares used in the computation of income per share - basic 3,884,026 5,618,748
============ ============
Shares used in the computation of income per share - diluted 4,398,163 5,673,805
============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
26
<PAGE> 29
INLAND ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
----------------------- PAID IN DEFERRED RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION EARNINGS EQUITY
--------- ---------- ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996............. 10,632,792 $ 2,352,554 $5,473,472 $ 7,826,026
Redemption of common stock......... (6,778,244) (2,348,699) (3,351,301) (5,700,000)
Net income......................... 3,759,160 3,759,160
--------- ---------- ---------- ---------- ---------- ----------
Balance at June 30, 1997............. 3,854,548 3,855 5,881,331 5,885,186
Exercise of stock options.......... 69,638 69 $ 173,884 173,953
Granting of non-employee stock
options.......................... 232,825 $ (90,000) 142,825
Additional consideration for 1996
stock redemption................. (406,709) (1,593,291) (2,000,000)
Net income......................... 2,395,937 2,395,937
--------- ---------- ---------- ---------- ---------- ----------
Balance at June 30, 1998............. 3,924,186 $ 3,924 $ $ (90,000) $6,683,977 $6,597,901
========= ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
27
<PAGE> 30
INLAND ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30,
<TABLE>
<CAPTION>
1998 1997
----------- -----------
Increase (decrease) in cash:
Net cash provided by operating activities:
<S> <C> <C>
Net income.......................................... $ 2,395,937 $ 3,759,160
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization....................... 2,509,122 2,808,629
Deferred taxes...................................... 142,201 191,943
Compensation for granting of non-employee stock
options........................................... 142,825
Decline in fair market value of bonds............... 26,221
Loss from sale of bonds............................. 10,500
Changes in assets and liabilities:
Accounts receivable................................. 18,456 21,054
Prepaid expenses and other current assets........... (91,955) (4,939)
Deposits and other assets........................... (301,323) 57,783
Accounts payable and accrued expenses............... 174,957 526,135
Income taxes payable................................ 37,607 (20,143)
Advances of future consulting fees.................. 423,795 (212,679)
----------- -----------
Net cash provided by operating activities........ 5,451,622 7,163,664
Cash flows provided by (used) in investing activities:
Short-term investments.............................. (1,876,667)
Restricted cash and other investments, net.......... (133,000) (2,397,993)
Sale of bonds....................................... 381,082
Purchase of furniture and equipment................. (1,040,163) (45,767)
Deferred contract costs............................. (115,511) (724,947)
----------- -----------
Net cash used in investing activities............ (3,165,341) (2,787,625)
----------- -----------
Cash flows provided by (used in) financing activities:
Payment of notes payable............................ (1,020,054) (279,946)
Repurchase and cancellation of common stock......... (200,000)
Loans to employees.................................. (132,462) (240,000)
Investments/other loans............................. (106,294)
Proceeds from exercise of stock options............. 173,953
------------
Net cash provided by (used in)
financing activities........................... (1,084,857) (719,946)
----------- -----------
Net increase in cash............................. 1,201,424 3,656,093
Cash at beginning of period........................... 8,004,078 4,347,985
----------- -----------
Cash at end of period................................. $ 9,205,502 $ 8,004,078
=========== ===========
Supplemental disclosures of cash flow information:
Interest expense paid............................... $ 443,121 $ 63,000
=========== ===========
Income taxes paid................................... $ 1,569,108 $ 2,357,000
=========== ===========
Settlement obligation............................... $ 230,409 $ 1,769,591
=========== ===========
Redemption of common stock by issuance of notes
payable........................................... $ 2,000,000 $ 5,500,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
28
<PAGE> 31
INLAND ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Description of Business
Inland Entertainment Corporation, a Utah corporation formerly known as
Inland Casino Corporation ("Inland Entertainment" or the "Company"), provides
consulting and other professional services for gaming operations with Native
American tribes. Substantially all of its revenue is earned from a consulting
agreement with the Barona Group of Capitan Grande Band of Mission Indians (the
"Barona Tribe") in connection with the Barona Tribe's operation of a gaming
facility located north of Lakeside, California, in eastern San Diego County.
Additionally, the Company provided consulting services to tribes in Oregon, New
Mexico, and Washington.
Operation of any type of gaming on Indian land is subject to Federal, state
and tribal regulation. Changes in regulations may limit or otherwise affect
Indian gaming and therefore could have a material effect on the operations of
the Company. As discussed in Note H, changes in the interpretation or the
enforcement of existing statutes or regulations relating to Indian gaming, new
statutes or regulations adverse to Indian gaming, and adverse decisions in
pending litigation regarding Indian gaming, in general, and in California,
specifically, could have a material adverse effect upon the financial condition
and operation of the Company.
During the fiscal year ended June 30, 1998, the Company began actively
researching and evaluating business opportunities in addition to Indian gaming.
The Company has pursued Internet related opportunities including, on-line
marketing, web site development, electronic commerce applications and strategic
internet related consulting. The Company has both gaming and non-gaming Internet
clients. In March 1998, the Company established a wholly-owned foreign
subsidiary, Worldwide Media Holdings N.V., a Curacao, Netherland Antilles
corporation ("WMH"). WMH was formed to provide comprehensive marketing,
advertising, technical and translation services for Internet related businesses,
including three international Internet casinos. WMH is responsible for all
marketing costs and is paid a fee for its services. (See Note H. Commitments
and Contingencies.)
2. Basis of Accounting
The Company reports revenues and expenses using the accrual method of
accounting. For all periods reported in these financial statements,
substantially all of the Company's consulting revenue is generated from services
provided to the Barona Tribe, with the exception of $117,000 in fees received
for work performed for a tribe in New Mexico during the year ended June 30, 1997
and $190,000 in fees received for work performed for a tribe in Oregon and
$21,000 in marketing fees generated by WMH during the year ended June 30, 1998.
3. Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and WMH, its wholly-owned subsidiary. All material inter-company accounts and
transactions have been eliminated.
4. Deferred Contract Costs
Pursuant to oral agreements with the Barona Tribe, the Company has agreed
to fund, or to arrange acceptable financing for, the construction of facility
improvements, furniture and equipment, the establishment of initial working
capital, and the losses, if any, of the Barona Casino's operations. Because the
Barona Tribe will not allow its land to be encumbered and has not assumed
liability for any of these obligations, the Company has capitalized those costs
incurred as deferred contract costs since (i) the Company had the ultimate
responsibility for such costs incurred in connection with developing the Barona
Casino and (ii) management believes that these costs are fully recoverable over
the life of the Barona Consulting Agreement (hereinafter defined) through
receipt of fee income from the Barona Casino. However, given the nature of the
asset, if the recoverability is determined to be not probable, the Company will
expense the unamortized portion. On an ongoing basis, the Company reviews the
valuation and recoverability of these unamortized deferred contract costs. As
part of this review, the Company estimates the discounted present value of the
future
29
<PAGE> 32
projected net income generated by the Barona Casino and the resulting revenue to
the Company to determine whether impairment has occurred.
Amortization of the deferred costs is calculated using the straight-line
method over the remaining term of the Barona Consulting Agreement. Under the
terms of the Barona Consulting Agreement, title to the Barona Casino facilities,
furniture and equipment rests solely with the Barona Tribe, unless the Barona
Tribe agrees otherwise. The Barona Consulting Agreement may be terminated by the
Barona Tribe for any material breach by the Company, as defined in such
agreement. Management is not aware of any material breach of the Barona
Consulting Agreement.
5. Revenue Recognition
Contract revenue is recorded as earned under the terms of the Barona
Consulting Agreement.
6. Credit Concentrations, Cash and Cash Equivalents
For purposes of the statement of cash flows, cash equivalents include time
deposits and all highly liquid debt instruments with original maturities of
three months or less.
The Company maintains its cash in bank deposit and checking accounts which,
at times, may exceed federally insured limits. The Company has not experienced
any losses in such accounts.
7. Short-term Investments
The Company's investments consist primarily of Euro-dollar time deposits,
certificates of deposits, and banker's acceptances with maturities ranging from
three months to six months. Interest rates earned during Fiscal 1998 on
investments ranged from 5.1% to 5.6%.
8. Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is calculated
using the straight-line method over the estimated useful lives (five years) of
the assets. Accelerated methods of depreciation are used for tax purposes.
9. Advances of Future Consulting Fees
Advances of future consulting fees represent payments made to the Company in
excess of consulting fees earned. The advances were used to fund a portion of
the cost of improvements to the Barona Casino. Advances are repaid through
reduction in payment of future consulting fees and are anticipated to be paid
within one year of the advance. These advances are unsecured, non-interest
bearing and are due on demand.
10. Deferred Income Taxes
Deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities. The effect of a change in tax rates is
recognized in earnings in the period that includes the enactment date. A
valuation allowance is provided when it is more likely that a portion of
deferred tax assets will not be realized.
30
<PAGE> 33
11. Net Income Per Share
During the fiscal year ended June 30, 1998, the Company adopted Statement
of Financial Accounting Standards No. 128, "Earnings Per Share." Basic earnings
per share is based on the weighted effect of all common shares issued and
outstanding, and is calculated by dividing net income available to common
stockholders by the weighted average shares outstanding during the period.
Diluted earnings per share is calculated by dividing net income available to
common stockholders by the weighted average number of common shares used in the
basic earnings per share calculation plus the number of common shares that would
be issued assuming conversion of all potentially dilutive securities
outstanding. Prior year amounts have been restated to reflect adoption of the
new standard. Below is the calculation of basic and diluted earnings per share
for the past two fiscal years:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
Net income available to common shareholders $2,395,937 $3,759,160
========== ==========
Weighted average shares outstanding - Basic 3,884,026 5,618,748
Effect of stock options 514,137 55,057
---------- ----------
Weighted average shares outstanding - Diluted 4,398,163 5,673,805
========== ==========
Earnings per common share:
Basic $ .62 $ .67
========== ==========
Diluted $ .54 $ .66
========== ==========
</TABLE>
Options to purchase 582,712 shares of common stock ranging from $3.75 to $4.13 a
share were outstanding during Fiscal 1998. They were not included in the
computation of diluted EPS because the options' exercise price was greater than
the average market price of the common shares. The options, which expire on
various future dates through April 2008 were still outstanding at June 30, 1998.
12. Accounting for Stock Options
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"),
which requires entities to calculate the fair value of stock awards granted to
employees. This statement provides entities with the option of either electing
to expense the fair value of employee stock-based compensation or continue to
recognize compensation expense under previously existing accounting
pronouncements and provide pro forma disclosures of net income and, if
presented, earnings per share, as if the above-referenced fair value method of
accounting was used in determining compensation expense. The Company continues
to account for stock based compensation arrangements in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"). The Company has included additional disclosures about
stock-based employee compensation plans required by SFAS No. 123 (see Note I).
Stock options issued to non-employees are recorded at the fair value of the
services received, which is charged to expense over the service period. Unearned
amounts are shown as deferred compensation in shareholders' equity.
13. 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, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
31
<PAGE> 34
14. Impairment of Long-Lived Assets
During its fiscal year ended June 30, 1997, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" ("SFAS No. 121"), which requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Adoption of SFAS No. 121 did not have a material impact on the
financial statements of the Company.
NOTE B -- BARONA CONSULTING AGREEMENT
The Company has provided services to the Barona Tribe since 1991. The
Company provides consulting services in accordance with the terms and conditions
of an Amended and Restated Consulting Agreement (the "Amended and Restated
Consulting Agreement"). During February 1998, the Company and the Barona Tribe
executed Modification #1 to the Amended and Restated Consulting Agreement (the
"Modification") which extended the term for providing consulting services by an
additional 60 months. Unless otherwise stated herein, the Amended and Restated
Consulting Agreement, as amended by the Modification, shall be referred to
herein as the "Barona Consulting Agreement." The Barona Consulting Agreement
expires in March 2004.
In March 1996, the Barona Tribe submitted the Initial Consulting Agreement,
(a predecessor agreement to the Amended and Restated Consulting Agreement), to
the National Indian Gaming Commission (the "NIGC"). In May 1996, the NIGC
determined that the Initial Consulting Agreement was not a management agreement
and, therefore, not subject to NIGC approval, and forwarded such agreement to
the Bureau of Indian Affairs (the "BIA"). In July 1997, the BIA reviewed the
Initial Consulting Agreement and determined that no further action by it with
respect to such agreement was required. The NIGC conducted an investigation of
the past relationship between the Barona Tribe and the Company that resulted in
a January 1997 settlement agreement. (See Note F.)
In January 1997, the Company submitted the Amended and Restated Consulting
Agreement to the NIGC. In April 1997, the Company received a letter from the
NIGC questioning whether the Amended and Restated Consulting Agreement was in
fact a management contract. The Company believes that the NIGC will ultimately
determine that the Amended and Restated Consulting Agreement is not a management
contract, based on (i) the May 1996 and July 1997 determinations of the NIGC and
BIA respectively, with respect to the Initial Consulting Agreement, (ii) the
NIGC's findings in the January 1997 settlement agreement and (iii) the actual
elements of the relationship between the Barona Casino and the Company. However,
there is no assurance that the NIGC will determine that the Amended and Restated
Consulting Agreement is not a management contract. If such a determination is
not made by the NIGC, the failure of the NIGC to approve the Amended and
Restated Consulting Agreement (and the Modification) could have a material
adverse effect on the business and financial condition of the Company. If the
NIGC concludes that the Amended and Restated Consulting Agreement (and the
Modification) is not a management agreement, the NIGC will forward the Agreement
to the BIA for its review. To the extent that the BIA determines that its
approval is required, there can be no assurance that the BIA will approve such
Agreement, and such failure to approve the Amended and Restated Consulting
Agreement (and the Modification) may have a material adverse effect on the
business and financial condition of the Company. The Company is in the process
of submitting the Modification to the NIGC.
NOTE C -- RESTRICTED CASH AND OTHER INVESTMENTS
From June 1996 to May 1997, the Company provided consulting services to the
Klamath and Modoc Tribes and the Yahooskin Band of Snake Indians (collectively,
the "Klamath Tribes"). The Klamath Tribes constructed the Kla-Mo-Ya Casino near
Chiloquin, in south central Oregon, a gaming facility funded by revenue bonds
issued by the Klamath Tribes. In connection with such bond financing, the
Company has a net investment of $464,320 in revenue bonds with a principal face
amount of $500,000. In addition, as a condition of the bond financing, the
Company agreed to hold the bonds for a five year period. Pre-opening costs and
expenses of approximately $1.5 million were financed by loans made pursuant to a
third-party bank credit agreement with the Klamath Tribes. The Company pledged a
certificate of deposit for $1,518,000 as collateral for such loans.
If the Klamath Tribes are unable to pay its obligations, the Company may
lose all or a portion of its investment in the revenue bonds it purchased and
its certificate of deposit pledged as collateral for bank loans to the Klamath
Tribes, which could have a material adverse effect on the financial condition of
the Company.
Additionally, the Company issued an irrevocable letter of credit for
$133,000 to satisfy the terms of the corporate office lease
32
<PAGE> 35
agreement. Such letter of credit will automatically renew on an annual basis
until October 31, 2002 unless canceled by the lessor.
NOTE D -- DEFERRED CONTRACT COSTS
Deferred contract costs consist of the following at June 30, 1998:
<TABLE>
<CAPTION>
<S> <C>
Deferred contract costs under Consulting
and Operations Agreements...................... $ 15,601,411
Less: accumulated amortization................... (11,745,984)
------------
$ 3,855,427
============
</TABLE>
NOTE E -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at June 30, 1998:
<TABLE>
<CAPTION>
<S> <C>
Leasehold improvements.................... $ 423,196
Computer equipment and software........... 354,692
Equipment................................. 190,449
Furniture................................. 141,324
Automotive equipment...................... 125,238
Construction in progress.................. 11,608
----------
1,246,507
Accumulated Depreciation.................. (222,887)
----------
$1,023,620
==========
</TABLE>
NOTE F -- STOCK REPURCHASE/LONG-TERM DEBT
1. Stock Repurchase Obligation
In March 1996, the Company repurchased its own common stock and outstanding
options from a former executive officer, director and principal shareholder of
the Company. The purchase price consisted of a $500,000 cash payment and
issuance of a $900,000, 7% unsecured promissory note which was paid in full in
September 1997. If the Company's common stock trading price reaches certain
levels during measurement periods prior to March 4, 1999, the former shareholder
will be entitled to up to $250,000 in additional compensation.
In September 1996, the Company entered into a Stock Purchase and Settlement
and Release Agreement with two shareholders, including a former director (the
"Stock Purchase Agreement"). The terms of the Stock Purchase Agreement included
(i) an aggregate cash payment of $200,000 to such shareholders upon closing,
(ii) the issuance of two unsecured promissory notes in the aggregate principal
amount of $3,500,000, with interest at the rate of 10% per annum, payments of
interest only for the first three years, followed by three equal annual
installments of principal repayment, with interest on the remaining balance
commencing September 30, 1997, (iii) a contingent obligation (the "Initial
Contingent Obligations") to issue an aggregate principal amount of $9,856,488 in
unsecured promissory notes to such shareholders including $2,000,000 in
principal amount of notes each year for four years and $1,856,488 in principal
amount of notes to be issued in a fifth year, each note with interest at 10%,
payment of interest only for three years, followed by three equal annual
installments of principal plus interest on the remaining principal balance, and
(iv) another contingent obligation (the "Second Contingent Obligation") to issue
an additional aggregate principal amount of $3,000,000 in unsecured promissory
notes (or cash, if Company has completed a firm commitment underwritten public
offering of securities of not less than $35 million prior to the contingencies
being met).
The Initial Contingent Obligations are contingent upon the Company's
retained earnings balance, with certain adjustments, being at least $4,000,000
for the fiscal year ending immediately prior to the date the notes are to be
issued. The test is to be made each year for eight successive years commencing
with the fiscal year ending June 30, 1997. The Second Contingent Obligation is
subject to the following conditions: (i) the Barona Tribe enters into a Class
III Gaming Compact (the "Compact") with the State of California which permits
the operation of video gaming machines at the Barona Casino in San Diego County;
(ii) at the time that the Barona Tribe enters into the Compact, the Company has
a consulting agreement or similar contractual arrangement with the Barona Tribe;
and (iii) consulting fees paid to the Company by the Barona Tribe relating to
the Barona Casino for any consecutive 12-month period within five years after
the Barona Tribe has entered into the Compact, equals or exceeds one and
one-half times such consulting fees for the year ended June 30, 1996. The
Company intends to record as the additional cost of the repurchase of its common
stock, each
33
<PAGE> 36
contingent obligation as each contingency or condition is met. All payments
pursuant to the Stock Purchase Agreement are further subject to compliance with
certain state law provisions and the Company's Articles of Incorporation
concerning repurchase transactions.
As of June 30, 1997 and June 30, 1998, the Company's retained earnings
exceeded $4,000,000. Accordingly, $2,000,000 in obligations were recorded at
June 30, 1997 and $2,000,000 at June 30, 1998, and have been treated as
additional consideration for the common stock repurchased under the Stock
Purchase Agreement.
2. NIGC Settlement Obligation
In January 1997, the Company entered into a settlement agreement with the
NIGC regarding the Company's relationship with the Barona Tribe (the "January
Settlement Agreement"). Under the terms of the January Settlement Agreement, the
NIGC held, among other things, that the relationship between the Barona Tribe
and the Company had benefitted the Barona Tribe, and that the Company had not
violated any law. The Company agreed to reimburse the NIGC for administrative,
investigative and legal expenses in the aggregate amount of $250,000. In
addition, the Company agreed to contribute $2,000,000 to the Barona Tribe for
general improvements on the reservation, payable in five equal annual
installments, commencing in January 1997. The Company accounted for the
$2,000,000 in payments as deferred contract costs, which are being amortized
over the remaining term of the Barona Consulting Agreement. Debt at June 30,
1998, includes $1,200,000 relating to the January Settlement Agreement, of which
$400,000 is currently payable.
Debt payments related to the Stock Repurchase Obligation and the NIGC
Settlement are scheduled as follows:
<TABLE>
<CAPTION>
JUNE 30,
1999 2000 2001 2002 2003 THEREAFTER TOTAL
----------- ----------- ----------- ----------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Ungar note #1 $ 589,517 $ 589,517 $ 589,516 $1,768,550
Ungar note #2 333,333 333,334 $ 333,333 1,000,000
Ungar note #3 333,333 666,667 1,000,000
Woods note #1 577,150 577,150 577,150 1,731,450
Woods note #2 333,333 333,334 333,333 1,000,000
Woods note #3 333,333 666,667 1,000,000
Barona Tribe $ 400,000 $ 400,000 400,000 1,200,000
----------- ---------- ---------- ----------- ---------- ----------- ----------
Total.......... $ 400,000 $ 400,000 $1,566,667 $ 1,833,333 $2,500,000 $ 2,000,000 $8,700,000
=========== ========== ========== =========== ========== =========== ==========
</TABLE>
34
<PAGE> 37
NOTE G -- INCOME TAXES
Deferred taxes are comprised of the following at June 30, 1998:
<TABLE>
<CAPTION>
<S> <C>
Excess of financial statement over tax deferred contract costs .......... $(164,652)
Excess of tax over financial statement fixed asset depreciation ......... (35,548)
Capitalized WMH losses .................................................. 118,018
Deferred compensation related to non-employee stock options ............. 61,186
California franchise taxes .............................................. 127,826
Allowance for doubtful accounts ......................................... 35,771
Valuation allowance ..................................................... (14,619)
---------
Deferred tax asset ...................................................... $ 127,982
=========
</TABLE>
The composition of the Company's income tax provision is as follows:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1998 1997
----------- ----------
Current tax:
<S> <C> <C>
Federal.......... $ 1,242,721 $1,797,112
State............ 375,957 538,945
----------- ----------
Current tax...... 1,618,678 2,336,057
Deferred tax:
Federal.......... 101,709 184,288
State............ 40,492 7,655
----------- ----------
Deferred tax..... 142,201 191,943
----------- ----------
Income tax provision $ 1,760,879 $2,528,000
=========== ==========
</TABLE>
A reconciliation from the U.S. statutory federal income tax rate to the
effective tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------
1998 1997
------ ------
<S> <C> <C>
U.S. Federal statutory rate... 34.0% 34.0%
State income taxes ........... 6.0% 6.0%
Other ........................ 2.4% 0.2%
------ ------
42.4% 40.2%
</TABLE>
NOTE H -- COMMITMENTS AND CONTINGENCIES
Worldwide Media Holdings, N.V.
In March 1998, WMH entered a five-year Software License and Support
Agreement (the "Software Agreement") for on-line casino technology and support.
An initial license fee will be amortized over the life of the Software
Agreement. WMH earns marketing fees based on the net profits of the on-line
casinos to promote and market such casinos. The Software Agreement is subject to
termination by the licensor for such reasons as WMH's non-compliance with gaming
and regulatory statutes, improper ownership of universal resource locators, or
the failure of the on-line casinos to meet certain sales targets. Additionally,
the Software Agreement obligates WMH, as the marketing representative, to spend
a minimum of $10,000 a month for the marketing and promotion of the on-line
casinos.
Lease Obligations
The Company has entered into operating leases for facilities and equipment
that expire at various dates through fiscal 2003. The minimum future payments
due under operating lease contracts at June 30, 1998 for the years ending June
30 are as follows:
<TABLE>
<S> <C>
1999 ....................... $ 228,655
2000 ....................... 236,027
2001 ....................... 241,049
2002 ....................... 248,968
2003 ....................... 84,764
----------
Net minimum lease payments . $1,039,463
==========
</TABLE>
Rental expense for Fiscal 1998 and Fiscal 1997 was $286,030 and $159,808,
respectively.
35
<PAGE> 38
Contingent Lease Obligations
The Company has guaranteed automobile lease and loan payments on behalf of
certain employees and Barona Casino executive employees. Such leases expire at
dates through 2003. Assuming all future payments were to be made by the Company
under this commitment, the Company would be obligated to pay approximately
$284,000. The Company has also guaranteed loans to certain Barona Casino
employees totaling approximately $50,000.
In addition, the Company signed lease agreements covering video machines
used in the operation of the Barona Casino. Such agreements are cancelable upon
30 days notice. These agreements are in the process of being assigned by the
Company to the Barona Tribe; however, in the event that the Barona Tribe does
not make the monthly rental payments under the agreements, the Company could be
required to make the payments.
Other
The Company has entered into other short-term contracts for consulting
services with commitments to vendors totaling approximately $445,000 as of June
30, 1998.
Company Litigation
The Company is subject to claims and lawsuits which arise in the ordinary
course of business. In the opinion of the Company, the resolution of such
matters will not have a material adverse effect on the Company's financial
condition or results of operations.
NOTE I -- STOCK OPTIONS
In 1994, the Board of Directors and shareholders of Inland Casino
Corporation, a Delaware corporation ("ICC") approved a Stock Option Plan (the
"1994 Plan") under which 27,838 incentive stock options and 41,756 non-statutory
stock options were granted. Upon the merger of ICC with and into the Company
(formerly known as Twin Creek Exploration Co., Inc.) on May 22, 1995, the 1994
Plan was terminated, but all options outstanding under the 1994 plan were
assumed by the Company and are immediately exercisable.
In 1995, the Board of Directors and the shareholders of the Company approved
the Company's 1995 Stock Option Plan (the "1995 Plan"). Under the terms of the
1995 Plan, options to purchase up to 4,000,000 shares of the Company's common
stock could be granted. In December 1997, the Board of Directors and the
shareholders of the Company approved an amendment to the 1995 Plan to increase
the number of shares of common stock available for issuance by 2,000,000. Shares
covered by options which terminate without exercise are available for
reissuance. Options may be issued to employees, consultants and directors of the
Company either as (i) incentive stock options; (ii) nonstatutory stock options;
or (iii) as combinations of both types of options.
Stock option grants are determined by the Compensation Committee of the
Board of Directors or, in the absence of the Compensation Committee, by the full
Board of Directors. Under the 1995 Plan, options granted to any single
individual cannot exceed 900,000 shares over any period of three consecutive
fiscal years. Options granted under the 1995 Plan have a maximum term of ten
years and are generally exercisable ratably over a four and one-half or five
year period following the date of grant. Incentive stock options must have an
exercise price of not less than fair market value on the date of grant.
Incentive stock options may be granted to any officer or key employee who owns
more than 10% of the Company's common stock only if the exercise price is at
least 110% of the fair market value on the date of grant, and such options must
have a maximum term of five years from date of grant. Non-statutory stock
options must have an exercise price of not less than 80% of the fair market
value on the date of grant.
In 1996, the Board of Directors and shareholders of the Company approved the
Company's 1996 Non-employee Directors Stock Option Plan (the "1996 Plan"). Under
the terms of the 1996 Plan, options to purchase up to 100,000 shares of the
Company's common stock may be granted. The 1996 Plan provides that each
non-employee director will automatically be granted an option to purchase 10,000
shares on the date such non-employee director is first elected to the Board of
Directors. In addition, the 1996 Plan provides that each non-employee director
will be granted an option to purchase 5,000 shares on the date of each of the
Company's Annual Meetings of Shareholders at which such non-employee director is
elected to the Board of Directors. The stock option grants will be issued as
non-statutory stock options, and the option price will be equal to the closing
price of the Company's common stock on the date of grant.
36
<PAGE> 39
The following table summarizes stock option activity under the 1994 Plan,
the 1995 Plan and the 1996 Plan (collectively the "Plans") for the periods
indicated:
<TABLE>
<CAPTION>
OPTIONS OPTION PRICE
OUTSTANDING PER SHARE
----------- -------------
<S> <C> <C>
Outstanding at June 30, 1996... 1,750,622 $1.00 -- $3.75
Year ended June 30, 1997:
Granted ..................... 1,614,440 $2.75 -- $3.75
Cancelled ................... (40,000) $3.50
---------
Outstanding at June 30, 1997... 3,325,062 $1.00 -- $3.75
---------
Year ended June 30, 1998:
Granted ..................... 1,989,816 $2.50 -- $4.13
Exercised ................... (69,638) $1.00 -- $3.63
Cancelled ................... (50,000) $2.88
---------
Outstanding at June 30, 1998... 5,195,240 $1.00 -- $4.13
---------
</TABLE>
Employee stock options are accounted for under APB No. 25 and related
interpretations. The exercise price of each option equals the market price of
the Company's stock on the date of grant; accordingly, under APB No. 25, no
compensation costs for employee grants were recognized for the Plans. Had
compensation cost for the Plans been determined based on the fair value of the
options at the grant dates consistent with the method of SFAS No. 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------
1998 1997
------------- ----------
<S> <C> <C>
Net income (loss)
As reported ............. $ 2,395,937 $3,759,160
Pro forma ............... $ (1,264,872) $ 176,853
Net income (loss) per share
As reported ............. $ 0.54 $ 0.66
Pro forma ............... $ (0.47) $ 0.04
</TABLE>
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes options-pricing model with the following
weighted-average assumptions used for grants in the years ended June 30, 1998
and 1997, respectively: dividend yield, 0.0% for both years; expected volatility
of 1.27 and 1.42; average risk-free interest rates of 5.6% and 6.2%; and
expected lives of 5 years for both years.
The Black-Scholes option valuation model was developed for used in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models required the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
The pro forma calculations are not indicative of current or future operating
results of the Company. In addition, the pro forma charges to income are
calculated without income tax benefit since none of the outstanding options have
been exercised. The stock option exercise date determines when the benefits may
be recorded.
NOTE J -- 401(k) SAVINGS PLAN
The Company has a 401(k) savings plan available to all employees.
Individuals may contribute up to 20% of their gross salary. The Company does not
currently have a policy to match any employee contributions and, through June
30, 1998, the only costs incurred by the Company have been minor administrative
fees.
37
<PAGE> 40
NOTE K --EVENTS (UNAUDITED) SUBSEQUENT TO DATE OF AUDITOR'S REPORT
Acquisition
On August 27, 1998, the Company acquired all of the outstanding shares of
Cyberworks Inc., a California corporation ("Cyberworks"), an Internet marketing
and online application developer. Under the terms of the agreement, the Company
exchanged 750,000 shares of its common stock and $500,000 in cash for 100% of
the capital stock of Cyberworks. Cyberworks will be operated as a wholly-owned
subsidiary of the Company. The acquisition will be accounted for as a purchase.
Tribal-State Compact
In August 1998, a Tribal-State Compact was signed between the State of
California and the Barona Tribe (the "Barona Compact"). This compact ended a
significant amount of uncertainty and concern about the future of gaming
activities at the Barona Casino.
The Barona Compact was signed by Governor Pete Wilson and Barona Chairman
Clifford LaChappa on August 12, 1998 and, thereafter, the Barona Tribal Council
voted to submit the Barona Compact to the U.S. Secretary of the Interior ("the
Secretary"). The Secretary has forty-five (45) days to either approve or reject
the terms of the Barona Compact. If approved by the Secretary, the effective
date of the Barona Compact will be the date of publication by the Secretary in
the Federal Register. A similar compact with the Pala Tribe was approved in
April 1998.
The initial term of the Barona Compact will terminate on January 1, 2009.
The Barona Tribe has been given the option to renew the Barona Compact for two
additional five (5) year terms upon written notice of renewal to the Governor
prior to the termination date. Such options may be denied if the Barona Tribe
has been found to have engaged in unauthorized Class III gaming on two or more
occasions or has committed violations of the terms of the Barona Compact on five
or more occasions.
Rather than the electronic machines currently in play at the Barona Casino,
the Barona Compact permits the following two varieties of Indian Lottery Games:
i) Indian Video Lottery Match Game, and ii) Indian Video Lottery Scratcher Game.
These games are premised on the concept that the patrons are playing against one
another and not the "house", since California prohibits house banked games,
whether electronic or cards. The Barona Tribe is allowed to operate 1,057
machines, but has been allocated only 199 machines. The balance of machines must
be licensed from other Federally recognized tribes for an annual fee of $5,000
per machine.
The Barona Tribe will be permitted to operate its existing 1,057 electronic
gaming devices for up to six months after the Barona Compact has been signed if
the Indian Lottery Games are not commercially available to the tribes. At the
present time, there are no such Indian Lottery devices available to any
compacted Indian Tribe in California. The device is not similar in functional
capability to any existing electronic gaming device or conventional slot
machine. The time limitation for conversion may be extended if the Indian
Lottery devices are still not certified for operation to the tribes or are not
commercially available by that time. In the event the lottery-based devices do
not produce an income stream consistent with that being earned by the machines
currently in play at the Barone Casino, the resulting decline in revenue from
Barona operations may have a material adverse impact on the fees paid to the
Company under the Consulting Agreement.
Additionally, under the Barona Compact, employees of tribal casinos must be
provided California worker's compensation, unemployment insurance, disability
insurance and guaranteed the right to engage in collective bargaining
activities. Patrons of such facilities will have the right to require binding
arbitration of player disputes. The Barona Tribe must carry public liability
insurance and agree to a limited waiver of its sovereign immunity for settlement
of patron injury claims.
38
<PAGE> 41
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
The information set forth under the captions "ELECTION OF DIRECTORS," and
"TRANSACTIONS WITH MANAGEMENT AND OTHERS --Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's definitive proxy statement (the "Proxy
Statement") for the Annual Meeting of shareholders scheduled to be held in
December 1998, is hereby incorporated herein by reference. The Proxy Statement
will be filed with the U.S. Securities and Exchange Commission (the
"Commission") not later than 120 days after the close of Fiscal 1998.
ITEM 10. EXECUTIVE COMPENSATION
The information set forth under the captions "COMPENSATION OF EXECUTIVE
OFFICERS" and "INFORMATION ABOUT THE BOARD OF DIRECTORS AND COMMITTEES OF THE
BOARD -- Compensation of Directors" in the Proxy Statement is hereby
incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT" in the Proxy Statement is hereby incorporated
herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "TRANSACTIONS WITH MANAGEMENT
AND OTHERS" in the Proxy Statement is hereby incorporated herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. The Exhibits listed below are filed with the Commission as
part of this annual report on Form 10-KSB. The Company will furnish a copy of
any exhibit upon request, but a reasonable fee will be charged to cover the
Company's expense in furnishing such exhibit.
Exhibit
No. Description
2.1 Agreement and Plan of Reorganization by and among the Company,
Cyberworks, Inc., Inland Acquisition Corporation and Richard T.
Harrison dated August 25, 1998, previously filed as Exhibit 2.01 to
the Company's Current Report on Form 8-K dated September 10, 1998,
filed with the Commission on September 11, 1998 (File No. 0-11532)
(the "September 11, 1998 Current Report"), which is hereby
incorporated herein by reference.
2.2 Agreement of Merger by and between Cyberworks, Inc. and Inland
Acquisition Corporation dated August 27, 1998, previously filed as
Exhibit 2.02 to the September 11, 1998 Current Report, which is
hereby incorporated herein by reference.
2.3 Articles of Merger by and between Cyberworks, Inc. and Inland
Acquisition Corporation dated August 27, 1998, previously filed as
Exhibit 2.03 to the September 11, 1998 Current Report, which is
hereby incorporated herein by reference.
3.1 Amended and Restated Articles of Incorporation of the Company
(formerly known as Twin Creek Exploration Co., Inc.), previously
filed as Exhibit 3.1 to the Company's Annual Report on Form 10-KSB
39
<PAGE> 42
for the Fiscal Year Ended June 30, 1995, filed with the Commission
on October 12, 1995 (File No. 0-11532) (the "Fiscal 1995 Annual
Report"), which is hereby incorporated herein by reference.
3.2 Articles of Amendment of the Company, previously filed as Exhibit 3
to the Company's Quarterly Report on Form 10-QSB for the Quarterly
Period Ended December 31, 1997, filed with the Commission on
February 13, 1998 (File No. O-1152), which is hereby incorporated
herein by reference.
3.3 Amended and Restated By-laws of the Company (formerly known as Twin
Creek Exploration Co., Inc.), previously filed as Exhibit 3.1 to the
Company's Quarterly Report on Form 10-QSB for the Quarterly Period
Ended March 31, 1996, filed with the Commission on May 17, 1996
(File No. 0-11532) (the "March 1996 Quarterly Report"), which is
hereby incorporated herein by reference.
MATERIAL CONTRACTS RELATING TO MANAGEMENT COMPENSATION PLANS OR ARRANGEMENTS
10.1 1994 Stock Option Plan of Inland Casino Corporation, a Delaware
corporation, previously filed as Exhibit 10.2 to the Fiscal 1995
Annual Report, which is hereby incorporated herein by reference.
10.2 The Company's 1995 Stock Option Plan, as amended, previously filed
as Appendix A to the Company's Proxy Statement dated October 28,
1997 filed with the Commission on October 28, 1997 (File No.
0-11532), which is hereby incorporated herein by reference.
10.3 The Company's 1996 Non-employee Directors Stock Option Plan.
10.4 Settlement and Release Agreement dated as of February 10, 1998, by
and between the Company and Duane Eberlein, previously filed as
Exhibit 10.1 to the Company's Quarterly Report on Form 10-QSB for
the Quarterly Period Ended March 31, 1998, filed with the Commission
on May 15, 1998 (File No. 0-11532) (the "March 1998 Quarterly
Report"), which is hereby incorporated herein by reference.
10.5 Settlement and Release Agreement dated as of March 6, 1998, by and
between the Company and Arthur Pfizenmayer, previously filed as
Exhibit 10.2 to the March 1998 Quarterly Report, which is hereby
incorporated herein by reference.
10.6 Stock Purchase and Settlement and Release Agreement by and between
the Company and Jack R. Smith dated February 23, 1996, previously
filed as Exhibit 10.1 to the March 1996 Quarterly Report, which is
hereby incorporated herein by reference.
10.7 Consulting Agreement dated as of February 13, 1998, by and between
the Company and Torrey Pines Consultants Inc., previously filed as
Exhibit 10.3 to the March 1998 Quarterly Report, which is hereby
incorporated herein by reference.
10.8 First Amendment to Consulting Agreement dated as of May 30, 1998, by
and between the Company and Torrey Pines Consultants Inc.
10.9 Employment Agreement by and among the Company, Cyberworks, Inc. and
Richard T. Harrison dated August 27, 1998, previously filed as
Exhibit 99.01 to the September 11, 1998 Current Report, which is
hereby incorporated herein by reference.
10.10 Noncompetition Agreement by and among the Company, Cyberworks, Inc.
and Richard T. Harrison dated August 27, 1998, previously filed as
Exhibit 99.02 to the September 11, 1998 Current Report, which is
hereby incorporated herein by reference.
OTHER MATERIAL CONTRACTS
10.11 Amended and Restated Consulting Agreement by and between the Company
and the Barona Group of Capitan Grande Band of Mission Indians (the
"Barona Tribe"), dated as of April 29, 1996, previously filed as
Exhibit 10.7 to the Company's Annual Report on form 10-KSB for the
Fiscal Year Ended June 30, 1996, filed with the Commission on
October 5, 1996 (File No. 0-11532) (the "Fiscal 1996 Annual
Report"), which is hereby incorporated herein by reference.
10.12 Modification No. 1 to Amended and Restated Consulting Agreement
dated as of February 17, 1998, by and between the Company and the
Barona Group of Capitan Grande Band of Mission Indians, previously
filed as Exhibit 10.4 to the March 1998 Quarterly Report, which is
hereby incorporated herein by reference.
40
<PAGE> 43
10.13 Amended and Restated Gaming Machine Location Agreement by and
between SSK Game Enterprises and the Company, dated December 1,
1995, previously filed as Exhibit 10.16 to the Fiscal 1996 Annual
Report, which is hereby incorporated herein by reference.
10.14 Amended and Restated Gaming Machine Location Agreement between Zino,
Inc. and the Company, dated December 1, 1995, previously filed as
Exhibit 10.17 to the Fiscal 1996 Annual Report, which is hereby
incorporated herein by reference.
10.15 Amended and Restated Gaming Machine Location Agreement between
American Heritage Amusement Corporation and the Company, dated
December 1, 1995, previously filed as Exhibit 10.18 to the Fiscal
1996 Annual Report, which is hereby incorporated herein by
reference.
10.16 Stock Purchase and Settlement and Release Agreement by and among the
Company, Jonathan Ungar and Alan Henry Woods, dated September 27,
1996, previously filed as Exhibit 2.1 to the Company's Current
Report on Form 8-K dated October 1, 1996, filed with the Commission
on October 1, 1996 (File No. 0-11532) (the "October 1, 1996 Current
Report"), which is hereby incorporated herein by reference.
10.17 Promissory Note dated September 30, 1996 in favor of Jonathan Ungar
in the principal amount of $1,768,550, previously filed as Exhibit
2.2 to the October 1, 1996 Current Report, which is hereby
incorporated herein by reference.
10.18 Promissory Note dated September 30, 1996 in favor of Alan Henry
Woods in the principal amount of $1,731,450, previously filed as
Exhibit 2.3 to the October 1, 1996 Current Report, which is hereby
incorporated herein by reference.
10.19 Promissory Note dated September 15, 1997 in favor of Jonathan Ungar
in the principal amount of $1,000,000.
10.20 Promissory Note dated September 15, 1997 in favor of Alan Henry
Woods in the principal amount of $1,000,000.
10.21 Promissory Note dated September 15, 1998 in favor of Jonathan Ungar
in the principal amount of $1,000,000.
10.22 Promissory Note dated September 15, 1998 in favor of Alan Henry
Woods in the principal amount of $1,000,000.
10.23 Talent Agreement dated October 30, 1995 by and between Kenny Rogers
Productions and the Company, previously filed as Exhibit 10.25 to
the Fiscal 1996 Annual Report, which is hereby incorporated herein
by reference.
10.24 Settlement Agreement dated January 3, 1997 by and between the
Company and the National Indian Gaming Commission, previously filed
as Exhibit 99 to the Company's Current Report on Form 8-K dated
January 7, 1997, filed with the Commission on January 7, 1997 (File
No. 0.11532), which is hereby incorporated herein by reference.
10.25 Lease Agreement dated September 27, 1997, by and between the Company
and Rancho Bernardo Associates, previously filed as Exhibit 10.1 to
the Company's Quarterly Report on Form 10-QSB for the Quarterly
Period Ended September 30, 1997, filed with the Commission on
November 13, 1997 (File No. O-11532), which is hereby incorporated
herein by reference.
10.26 Software Support and Supply Agreement dated as of March 13, 1998, by
and between Worldwide Media Holdings N.V. and Intertainet Overseas
Licensing Limited, previously filed as Exhibit 10.5 to the March
1998 Quarterly Report, which is hereby incorporated herein by
reference.
10.27 Appointment of Marketing Representative dated as of March 13, 1998,
by and between Worldwide Media Holdings N.V., Intertainet Overseas
Licensing Limited, Cyberluck Curacao N.V. and Berdenac Holdings
N.V., previously filed as Exhibit 10.6 to the March 1998 Quarterly
Report, which is hereby incorporated herein by reference.
21 Subsidiaries of Registrant.
23 Consent of Grant Thornton LLP.
41
<PAGE> 44
27.1 Financial Data Schedule.
27.2 Financial Data Schedule for the Quarterly Period ended September 30,
1997 - Restated.
27.3 Financial Data Schedule for Fiscal 1997 - Restated.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed with the Commission during the fourth
quarter of the fiscal year covered by this Form 10-KSB.
42
<PAGE> 45
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INLAND ENTERTAINMENT CORPORATION,
a Utah corporation
Dated: September 28, 1998 By /s/ L. DONALD SPEER, II
----------------------------------------------
L. Donald Speer, II
Chairman of the Board and Chief Executive
Officer, President and Chief Operating Officer
(Principal Executive Officer)
In accordance with the Exchange Act, 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>
/s/ L. DONALD SPEER, II September 28, 1998
- --------------------------------------------------
L. Donald Speer, II,
Chairman of the Board and Chief Executive Officer,
President and Chief Operating Officer
and a Director (Principal Executive Officer)
/s/ RICHARD T. HARRISON September 28, 1998
- --------------------------------------------------
Richard T. Harrison
President and Chief Operating Officer of Cyberworks, Inc.
and a Director
/s/ ANDREW B. LAUB September 28, 1998
- --------------------------------------------------
Andrew B. Laub
Executive Vice President, Chief Financial Officer,
Treasurer and a Director
(Principal Financial and Accounting Officer)
/s/ G. FRITZ OPEL September 28, 1998
- --------------------------------------------------
G. Fritz Opel
Executive Vice President, Marketing and
Consulting Services and a Director
/s/ THOMAS G. HOLMES September 28, 1998
- --------------------------------------------------
Thomas G. Holmes
Vice President of Technology
and a Director
/s/ JANA MCKEAG September 28, 1998
- --------------------------------------------------
Jana McKeag
Vice President, Governmental Relations
and a Director
/s/ CHARLES REIBEL September 28, 1998
- --------------------------------------------------
Charles Reibel
Director
/s/ CORNELIUS E. SMYTH September 28, 1998
- --------------------------------------------------
Cornelius E. ("Neil") Smyth
Director
</TABLE>
43
<PAGE> 46
INDEX TO EXHIBITS
Exhibit
No. Description
2.1 Agreement and Plan of Reorganization by and among the Company,
Cyberworks, Inc., Inland Acquisition Corporation and Richard T.
Harrison dated August 25, 1998, previously filed as Exhibit 2.01 to
the Company's Current Report on Form 8-K dated September 10, 1998,
filed with the Commission on September 11, 1998 (File No. 0-11532)
(the "September 11, 1998 Current Report"), which is hereby
incorporated herein by reference.
2.2 Agreement of Merger by and between Cyberworks, Inc. and Inland
Acquisition Corporation dated August 27, 1998, previously filed as
Exhibit 2.02 to the September 11, 1998 Current Report, which is
hereby incorporated herein by reference.
2.3 Articles of Merger by and between Cyberworks, Inc. and Inland
Acquisition Corporation dated August 27, 1998, previously filed as
Exhibit 2.03 to the September 11, 1998 Current Report, which is
hereby incorporated herein by reference.
3.1 Amended and Restated Articles of Incorporation of the Company
(formerly known as Twin Creek Exploration Co., Inc.), previously
filed as Exhibit 3.1 to the Company's Annual Report on Form 10-KSB
for the Fiscal Year Ended June 30, 1995, filed with the Commission
on October 12, 1995 (File No. 0-11532) (the "Fiscal 1995 Annual
Report"), which is hereby incorporated herein by reference.
3.2 Articles of Amendment of the Company, previously filed as Exhibit 3
to the Company's Quarterly Report on Form 10-QSB for the Quarterly
Period Ended December 31, 1997, filed with the Commission on
February 13, 1998 (File No. O-1152), which is hereby incorporated
herein by reference.
3.3 Amended and Restated By-laws of the Company (formerly known as Twin
Creek Exploration Co., Inc.), previously filed as Exhibit 3.1 to the
Company's Quarterly Report on Form 10-QSB for the Quarterly Period
Ended March 31, 1996, filed with the Commission on May 17, 1996
(File No. 0-11532) (the "March 1996 Quarterly Report"), which is
hereby incorporated herein by reference.
MATERIAL CONTRACTS RELATING TO MANAGEMENT COMPENSATION PLANS OR ARRANGEMENTS
10.1 1994 Stock Option Plan of Inland Casino Corporation, a Delaware
corporation, previously filed as Exhibit 10.2 to the Fiscal 1995
Annual Report, which is hereby incorporated herein by reference.
10.2 The Company's 1995 Stock Option Plan, as amended, previously filed
as Appendix A to the Company's Proxy Statement dated October 28,
1997 filed with the Commission on October 28, 1997 (File No.
0-11532), which is hereby incorporated herein by reference.
10.3 The Company's 1996 Non-employee Directors Stock Option Plan.
10.4 Settlement and Release Agreement dated as of February 10, 1998, by
and between the Company and Duane Eberlein, previously filed as
Exhibit 10.1 to the Company's Quarterly Report on Form 10-QSB for
the Quarterly Period Ended March 31, 1998, filed with the Commission
on May 15, 1998 (File No. 0-11532) (the "March 1998 Quarterly
Report"), which is hereby incorporated herein by reference.
10.5 Settlement and Release Agreement dated as of March 6, 1998, by and
between the Company and Arthur Pfizenmayer, previously filed as
Exhibit 10.2 to the March 1998 Quarterly Report, which is hereby
incorporated herein by reference.
10.6 Stock Purchase and Settlement and Release Agreement by and between
the Company and Jack R. Smith dated February 23, 1996, previously
filed as Exhibit 10.1 to the March 1996 Quarterly Report, which is
hereby incorporated herein by reference.
10.7 Consulting Agreement dated as of February 13, 1998, by and between
the Company and Torrey Pines Consultants Inc., previously filed as
Exhibit 10.3 to the March 1998 Quarterly Report, which is hereby
incorporated herein by reference.
10.8 First Amendment to Consulting Agreement dated as of May 30, 1998, by
and between the Company and Torrey Pines Consultants Inc.
44
<PAGE> 47
10.9 Employment Agreement by and among the Company, Cyberworks, Inc. and
Richard T. Harrison dated August 27, 1998, previously filed as
Exhibit 99.01 to the September 11, 1998 Current Report, which is
hereby incorporated herein by reference.
10.10 Noncompetition Agreement by and among the Company, Cyberworks, Inc.
and Richard T. Harrison dated August 27, 1998, previously filed as
Exhibit 99.02 to the September 11, 1998 Current Report, which is
hereby incorporated herein by reference.
OTHER MATERIAL CONTRACTS
10.11 Amended and Restated Consulting Agreement by and between the Company
and the Barona Group of Capitan Grande Band of Mission Indians (the
"Barona Tribe"), dated as of April 29, 1996, previously filed as
Exhibit 10.7 to the Company's Annual Report on form 10-KSB for the
Fiscal Year Ended June 30, 1996, filed with the Commission on
October 5, 1996 (File No. 0-11532) (the "Fiscal 1996 Annual
Report"), which is hereby incorporated herein by reference.
10.12 Modification No. 1 to Amended and Restated Consulting Agreement
dated as of February 17, 1998, by and between the Company and the
Barona Group of Capitan Grande Band of Mission Indians, previously
filed as Exhibit 10.4 to the March 1998 Quarterly Report, which is
hereby incorporated herein by reference.
10.13 Amended and Restated Gaming Machine Location Agreement by and
between SSK Game Enterprises and the Company, dated December 1,
1995, previously filed as Exhibit 10.16 to the Fiscal 1996 Annual
Report, which is hereby incorporated herein by reference.
10.14 Amended and Restated Gaming Machine Location Agreement between Zino,
Inc. and the Company, dated December 1, 1995, previously filed as
Exhibit 10.17 to the Fiscal 1996 Annual Report, which is hereby
incorporated herein by reference.
10.15 Amended and Restated Gaming Machine Location Agreement between
American Heritage Amusement Corporation and the Company, dated
December 1, 1995, previously filed as Exhibit 10.18 to the Fiscal
1996 Annual Report, which is hereby incorporated herein by
reference.
10.16 Stock Purchase and Settlement and Release Agreement by and among the
Company, Jonathan Ungar and Alan Henry Woods, dated September 27,
1996, previously filed as Exhibit 2.1 to the Company's Current
Report on Form 8-K dated October 1, 1996, filed with the Commission
on October 1, 1996 (File No. 0-11532) (the "October 1, 1996 Current
Report"), which is hereby incorporated herein by reference.
10.17 Promissory Note dated September 30, 1996 in favor of Jonathan Ungar
in the principal amount of $1,768,550, previously filed as Exhibit
2.2 to the October 1, 1996 Current Report, which is hereby
incorporated herein by reference.
10.18 Promissory Note dated September 30, 1996 in favor of Alan Henry
Woods in the principal amount of $1,731,450, previously filed as
Exhibit 2.3 to the October 1, 1996 Current Report, which is hereby
incorporated herein by reference.
10.19 Promissory Note dated September 15, 1997 in favor of Jonathan Ungar
in the principal amount of $1,000,000.
10.20 Promissory Note dated September 15, 1997 in favor of Alan Henry
Woods in the principal amount of $1,000,000.
10.21 Promissory Note dated September 15, 1998 in favor of Jonathan Ungar
in the principal amount of $1,000,000.
10.22 Promissory Note dated September 15, 1998 in favor of Alan Henry
Woods in the principal amount of $1,000,000.
10.23 Talent Agreement dated October 30, 1995 by and between Kenny Rogers
Productions and the Company, previously filed as Exhibit 10.25 to
the Fiscal 1996 Annual Report, which is hereby incorporated herein
by reference.
10.24 Settlement Agreement dated January 3, 1997 by and between the
Company and the National Indian
45
<PAGE> 48
Gaming Commission, previously filed as Exhibit 99 to the Company's
Current Report on Form 8-K dated January 7, 1997, filed with the
Commission on January 7, 1997 (File No. 0.11532), which is hereby
incorporated herein by reference.
10.25 Lease Agreement dated September 27, 1997, by and between the Company
and Rancho Bernardo Associates, previously filed as Exhibit 10.1 to
the Company's Quarterly Report on Form 10-QSB for the Quarterly
Period Ended September 30, 1997, filed with the Commission on
November 13, 1997 (File No. O-11532), which is hereby incorporated
herein by reference.
10.26 Software Support and Supply Agreement dated as of March 13, 1998, by
and between Worldwide Media Holdings N.V. and Intertainet Overseas
Licensing Limited, previously filed as Exhibit 10.5 to the March
1998 Quarterly Report, which is hereby incorporated herein by
reference.
10.27 Appointment of Marketing Representative dated as of March 13, 1998,
by and between Worldwide Media Holdings N.V., Intertainet Overseas
Licensing Limited, Cyberluck Curacao N.V. and Berdenac Holdings
N.V., previously filed as Exhibit 10.6 to the March 1998 Quarterly
Report, which is hereby incorporated herein by reference.
21 Subsidiaries of Registrant.
23 Consent of Grant Thornton LLP.
27.1 Financial Data Schedule.
27.2 Financial Data Schedule for the Quarterly Period ended September 30,
1997 - Restated.
27.3 Financial Data Schedule for Fiscal 1997 - Restated.
<PAGE> 1
EXHIBIT 10.3
INLAND CASINO CORPORATION
1996 NONEMPLOYEE DIRECTORS STOCK OPTION PLAN, AS AMENDED
SECTION 1. PURPOSE.
The purpose of the Inland Casino Corporation 1996 Nonemployee
Directors Stock Option Plan (the "Plan") is to attract, retain and compensate
highly qualified individuals to serve as members of the Board of Directors who
are not current employees of Inland Casino Corporation (the "Company") and to
enable them to increase their ownership of shares of common stock, par value
$.001 per share, of the Company ("Common Stock"). The Plan will be beneficial to
the Company and its shareholders since it will allow these directors to have a
greater personal financial stake in the Company through the ownership of Common
Stock, in addition to underscoring their common interest and identification with
shareholders in increasing the value of Common Stock.
SECTION 2. SHARES SUBJECT TO PLAN.
The total number of shares of Common Stock with respect to which
options may be granted under the Plan shall not exceed 100,000 (as adjusted
pursuant to Section 7 hereof). Shares issued upon exercise of options granted
under the Plan may be either authorized and previously unissued shares, issued
shares which have been reacquired by the Company, or any combination thereof. In
the event that any option granted under the Plan shall terminate, expire or,
with the consent of the optionee, be cancelled as to any shares of Common Stock,
without having been exercised in full, new options may be granted with respect
to such shares without again being charged against the maximum share limitations
set forth above in this Section 2.
SECTION 3. ADMINISTRATION.
The Plan shall be administered by a committee consisting of all
directors who are not eligible to participate in the Plan and the Chief
Financial Officer of the Company (the "Committee"). Subject to the provisions of
the Plan, the Committee shall be authorized to interpret the Plan, to establish,
amend and rescind any rules and regulations relating to the Plan, and to make
all other determinations necessary or advisable for the administration of the
Plan. The Committee shall have no discretion with respect to the eligibility or
selection of directors to receive options under the Plan, the times at which
options shall be granted or shall become exercisable, the number of shares
subject to any such options or the Plan, or the purchase price thereunder,
except for adjustments as described in Section 7. The Committee shall not have
the authority to take any action or make any determination that would materially
increase the benefits accruing to participants under the Plan. The determination
of the Committee in the administration of the Plan, as described herein, shall
be final and conclusive and binding upon all persons, including, without
limitation, the Company, its shareholders and persons granted options under the
Plan. The Secretary of the Company shall be authorized to implement the Plan in
accordance with its terms and to take such actions of a ministerial nature as
shall be necessary to effectuate the intent and purposes hereof. The validity,
construction, and effect of the Plan and any rules and regulations relating to
the Plan shall be determined in accordance with the internal substantive laws of
the State of Utah.
1
<PAGE> 2
SECTION 4. ELIGIBILITY.
All members of the Company's Board of Directors who are not current
employees of the Company or any of its subsidiaries at the time of the option
award ("Nonemployee Directors") are eligible to participate in the Plan.
SECTION 5. OPTION AWARDS.
(a) Initial Awards. Each Nonemployee Director who was in office
immediately prior to the meeting at which the shareholders of the Company
approve this Plan and continues in office immediately after the meeting at which
the shareholders of the Company approve this Plan shall be granted an option to
purchase 10,000 shares of Common Stock. Such option shall be granted on the date
of the shareholders' meeting at which this Plan is approved (the "Effective
Date").
(b) Future Awards. (i) Each Nonemployee Director who first becomes a
member of the Board at the meeting at which the shareholders of the Company
approve this Plan or after the Effective Date shall be granted an option to
purchase 10,000 shares of Common Stock (as adjusted pursuant to Section 7
hereof) automatically on the date of his or her election to the Board of
Directors.
(ii) Each Nonemployee Director shall be granted an option to
purchase 5,000 shares of Common Stock (as adjusted pursuant to
Section 7 hereof) automatically effective on the date of each of the
Company's Annual Meeting of Shareholders, commencing on the
Effective Date, at which such Nonemployee Director is elected a
Nonemployee Director.
(c) Nonstatutory Stock Options. All options granted under the Plan
shall be nonstatutory options not intended to qualify under Section 422 of the
Internal Revenue Code, as in effect from time to time (the "Code"). Each option
granted under the Plan shall provide that such option shall not be treated as an
"incentive stock option," as that term is defined in Section 422(b) of the Code.
SECTION 6. TERMS AND CONDITIONS OF OPTIONS.
All options granted under the Plan shall be evidenced by stock
option agreements in writing (hereinafter referenced to as "option agreements"),
in such form as the Committee may from time to time approve, executed on behalf
of the Company by the Chairman of the Board or the President of the Company.
Each option agreement shall be subject to the Plan, and, in addition to such
other terms and conditions as the Committee may deem desirable, shall provide in
substance as follows:
(a) Purchase Price. The purchase price per share of Common Stock for
which each option is exercisable shall be equal to 100% of the fair market value
of a share of Common Stock as of the date such option is granted ("Fair Market
Value"). Such Fair Market Value shall be, for any date, (i) the closing price of
the Common Stock on such date, if available, or, if there are no sales of the
Common Stock on such date or if a closing sales price is not available, (ii) the
average of the "bid" and "asked" prices of Common Stock on such date, in each
case as reported by The Nasdaq Stock Market or any national securities exchange
on which the Common Stock is then traded or any other generally recognized
over-the-counter trading or quotation system if the Common Stock is traded in
the over-the-counter market or if (i) or (ii) are not available, the fair market
value on such date as determined by the Committee in accordance with applicable
law and regulations. The option price shall be subject to adjustment as provided
in Section 7 hereof.
(b) Exercisability and Terms of Options. Subject to Section 6(c)
hereof, each option granted pursuant to Sections 5(a) and 5(b) hereof shall be
exercisable in full six months following the date of grant;
2
<PAGE> 3
provided, however, that the Board of Directors shall have the discretion to
accelerate the vesting of any options granted to an optionee if such optionee's
service as a director of the Company ceases prior to the vesting of such
options. Each option granted under the Plan shall expire 10 years from the date
of grant and shall be subject to earlier termination as hereinafter provided. If
a Nonemployee Director subsequently becomes an employee of the Company while
remaining a member of the Board of Directors, any options held under the Plan by
such individual at the time of such commencement of employment shall not be
affected thereby.
(c) Cessation of Service. Except as hereinafter set forth, no option
shall be exercisable after the date of cessation of an optionee's service as a
director of the Company. Upon the death of an optionee at any time, all of the
then outstanding options of such optionee shall become immediately exercisable.
If an optionee's service ceases for any reason, such optionee's exercisable
options may be exercised by the optionee within one year after such cessation of
service. If an optionee shall die within such one-year period, or if cessation
of his or her service shall have been due to such optionee's death, such options
may be exercised at any time within one year after such death by the optionee's
executor or administrator or by his or her distributee to whom such options may
have been transferred by will or by the laws of descent and distribution. The
foregoing provisions shall not extend the period during which an option may be
exercised beyond the date it expires by its terms.
(d) Manner of Exercise. Each option agreement shall provide that any
option therein granted shall be exercisable only by giving in each case written
notice of exercise, accompanied by full payment of the purchase price either (i)
in cash (including check, bank draft, or money order, or wire or other transfer
of funds, or advice of credit to the Company), (ii) in shares of Common Stock
with a fair market value equal to the purchase price or (iii) a combination of
cash and shares of Common Stock which in the aggregate are equal in value to
such purchase price. At the discretion of the Committee, the option agreement
may provide that shares of Common Stock may be issued in the name of the
optionee and another person jointly with the right of survivorship. All grants
will provide for a deferred payment of the purchase price from the proceeds of
sale through a bank or broker on the date of exercise of some or all of the
shares of Common Stock to which the exercise relates.
(e) Nontransferability. Each option agreement shall provide that any
option therein granted is not transferable by the optionee other than by will or
by the laws of descent and distribution or a qualified domestic relations order
and that, during the lifetime of the optionee, such option may be exercised only
by the optionee or such optionee's legal representative or permitted successor.
SECTION 7. ADJUSTMENT UPON CHANGES IN STOCK.
The Committee shall make or provide for such adjustments in the
option price and in the number or kind of shares or other securities (including
shares or other securities of another issuer) covered by outstanding options as
the Committee in its sole discretion, exercised in good faith, shall determine
is equitably required to prevent dilution or enlargement of rights of optionees
that would otherwise result from (a) any stock dividend, stock split,
combination of shares, issuance of rights or warrants to purchase stock,
spin-off, recapitalization or other changes in the capital structure of the
Company, (b) any merger, consolidation, reorganization or partial or complete
liquidation, or (c) any other corporate transaction or event having an effect
similar to any of the foregoing. The Committee also shall make or provide for
such adjustment in the number or kind of shares of the Company's capital stock
or other securities (or in shares or other securities of another issuer) which
may be acquired pursuant to options granted under the Plan and the number of
such securities to be awarded to each optionee as the Committee in its sole
discretion, exercised in good faith, shall determine is appropriate to reflect
any transaction or event described in the preceding sentence. In the event of
any such transaction or event, the Committee may provide in substitution for any
3
<PAGE> 4
or all outstanding options under the Plan such alternative consideration
(including securities of any surviving entity) as it may in good faith determine
to be equitable under the circumstances and may require in connection therewith
the surrender of all options so replaced. In any case, such substitution of
securities shall not require the consent of any person who is granted options
pursuant to the Plan. The determination of the Committee as to what adjustments
shall be made, and the extent thereof, shall be final, binding and conclusive.
SECTION 8. FRACTIONAL SHARES.
No fractional shares shall be issued pursuant to options granted
hereunder and any fractional share resulting from an adjustment pursuant to
Section 7 hereof shall be eliminated.
SECTION 9. GOVERNMENT REGULATIONS.
The Plan, the grant and exercise of options hereunder, and the
Company's obligation to sell and deliver shares of stock pursuant to any such
exercise, shall be subject to all applicable federal and state laws, rules and
regulations and to such approvals by any regulatory or government agency as
shall be required.
SECTION 10. TERM OF THE PLAN.
The Plan shall become effective on the Effective Date. The Plan
shall terminate at such time as all of the shares of Common Stock authorized
under Section 2 of this Plan have been granted. In the event that at any future
grant date as determined under Section 5 hereof, the aggregate number of options
to be granted at such time exceed the remaining options available under the Plan
as determined in accordance with Section 2 hereof, the remaining options
available shall be granted on a pro rata basis among each Nonemployee Director.
Termination of the Plan, however, shall not affect outstanding options which
have been granted prior to such termination, and all unexpired options shall
continue in full force and operation after termination of the Plan, except as
they shall lapse or terminate by their own terms and conditions, and the terms
of the Plan shall continue to apply to such options.
SECTION 11. AMENDMENT, SUSPENSION OR TERMINATION OF THE PLAN.
The Board of Directors at any time and from time to time may, amend,
suspend or terminate the Plan; provided, however, that no amendment to the Plan
may increase the number of shares of Common Stock which may be granted pursuant
to the Plan without the approval of a majority of the total votes cast by
shareholders in person or by proxy on such proposal to amend the Plan. Without
the written consent of the optionee, no amendment, suspension or termination of
the Plan shall adversely affect any option previously granted under the Plan,
but it shall be conclusively presumed that any adjustment or change as provided
in Section 7 does not adversely affect any such right.
SECTION 12. NO RIGHT TO CONTINUE AS DIRECTOR.
Neither the Plan, nor the granting of an option nor any other action
taken pursuant to the Plan, shall constitute or be evidence of any agreement or
understanding, express or implied, that a director has a right to continue as a
director for any period of time, or at any particular rate of compensation.
4
<PAGE> 1
EX 10.8
FIRST AMENDMENT TO CONSULTING AGREEMENT
This FIRST AMENDMENT TO CONSULTING AGREEMENT, ("Amendment") is made and
entered into as of May 30, 1998, by and among Inland Entertainment Corporation,
a Utah corporation (the "Company"), and Torrey Pines Consultants, Inc., a
California corporation (the "Consultant").
RECITALS
WHEREAS the parties hereto have previously entered into that certain Consulting
Agreement (the"Agreement") dated February 13, 1998; and
WHEREAS the parties desire and intend to amend and modify the Agreement as set
forth herein.
NOW THEREFORE, for good and valuable consideration, receipt of which is
acknowledged hereby, Company and Consultant hereby agree as follows:
1. Incorporation by Reference. The parties hereto incorporate by reference
herein each and every covenant, term and condition contained in the Agreement as
if more fully set forth herein, subject only to the amendment and modifications
contained in this Amendment.
2. Amendment & Modification. In accordance with the provisions of Section 15 of
the Agreement, the parties hereby amend and modify the Agreement as follows:
(A) Consulting Services. Section 1.1 is amended as follows:
"1.1 Scope and Term. During the period from February 13, 1998, through
February 13, 1999, the ("Consultation Period"), the Consultant agrees to provide
consulting services from time to time to the Company. During the Consultation
Period, the Consultant shall be engaged by the Company in a consulting capacity
to tender such advisory services and projects as the Consultant may be assigned
from time to time by the Chairman of the Board of the Company for matters
specifically relating to the Barona Casino and the Barona Band of Mission
Indians. The Consultant shall submit a written report regarding the project
assignment and/or services rendered within 15 days of the end of each month of
the Consultation Period (the "Due Date"). If Consultant fails to submit this
written report to the Chairman of the Board within 30 days of the Due Date,
payment to the Consultant under Section 2 shall be suspended. It is further
agreed that either party may terminate this agreement upon 30 days prior written
notice. In the event that Company terminates this agreement prior to the end of
the Consultation Period, the Consultant shall receive all unpaid compensation
due as set forth in Section 2 and shall also receive vesting in the Stock
options as set forth in Section 2.1 as if this agreement was not terminated by
Company. THE PARTIES HERETO SHALL HAVE THE OPTION TO RENEW AND/OR EXTEND THIS
AGREEMENT BEYOND THE INITIAL CONSULTATION PERIOD. THE PARTY SEEKING THE
EXTENSION OR RENEWAL OF THIS AGREEMENT SHALL PROVIDE THE OTHER PARTY WITH
WRITTEN NOTICE OF THE SAME 30 DAYS PRIOR TO THE EXPIRATION OF THE INITIAL
CONSULTATION PERIOD. UPON RECEIPT OF SUCH WRITTEN NOTICE, THE PARTIES SHALL
ENDEAVOR IN GOOD FAITH TO REACH AN AGREEMENT REGARDING THE EXTENSION OR RENEWAL
OF THIS AGREEMENT. HOWEVER, NEITHER PARTY IS HEREBY OBLIGATED TO EXTEND OR RENEW
THIS AGREEMENT AND ANY SUCH EXTENSION OR RENEWAL SHALL BE UPON TERMS AND
CONDITIONS AS MAY BE AGREED BY THE PARTIES."
(B) Compensation. Section 2 is hereby amended as follows:
2. "Compensation During Consultation Period. During the Consultation
Period, so long as its sole shareholder is physically and mentally able, the
Consultant shall render consultative services to the Company as provided in
Section 1 of this Agreement. The Company shall pay the Consultant as
compensation for its services for the one (1) year period commencing on February
13, 1998, and ending February 13, 1999 THE SUM OF $12,500 PER MONTH TOGETHER
WITH A RETAINER OF $5,500. ALL PERIODIC PAYMENTS HEREIN SHALL BE PAID on the
10th day following the end of each month of the Consultation Period.
1
<PAGE> 2
Such payments shall not be made in the event of the death of the Consultant's
sole shareholder or his disability during the Consultation Period. Furthermore,
compensation shall cease upon the termination of this Agreement, OR ANY
EXTENSION OR MODIFICATION HEREOF, except as provided above. The Consultant shall
not be entitled to any payments other than as set forth in this Section 2."
3. Entire Agreement/Merger. This Amendment together with the Agreement contains
the entire and complete understanding among the parties concerning its subject
matter and all representations , agreements, arrangements and understandings
between or among the parties, whether oral or written, have been fully merged
herein and are superceded hereby.
4. Severability. In the event that any one or more of the provisions contained
herein (or parts thereof), or the application thereof in any circumstances, is
held invalid, illegal or unenforceable in any respect for any reason, the
validity and enforceability of any such provision in every other respect and of
the remaining provisions hereof shall not be in any way impaired or affected, it
being intended that all of the rights and privileges shall be enforceable to the
fullest extent permitted by law.
5. Binding Effect. (a) This Amendment shall be binding upon and inure to the
benefit of the Consultant and any successor of or to the Company, including,
without limitation, any persons acquiring directly or indirectly all or
substantially all of the business and/or assets of the Company whether by
purchase, merger, consolidation, reorganization or otherwise (and successor
shall thereafter be deemed included in the definition of the Company for
purposes of this Amendment), but shall not otherwise be assignable or delegable
by the Company. Unless the Consultant otherwise agrees the Company's obligations
hereunder shall not be terminated by any such acquisition of all or
substantially all of the business and/or assets of the Company.
(b) This Amendment shall inure to the benefit of and be
enforceable by the Consultant's and its sole shareholder's personal or legal
representatives, executors, administrators, successors, heirs, distributees
and/or legatees.
(c) This Amendment is personal in nature and neither of the
parties hereto shall, without the consent of the other, assign, transfer or
delegate this Amendment or any rights or obligations hereunder except as
expressly provided in subparagraph (a) of this Paragraph.
(d) This Amendment is intended to be for the exclusive
benefit of the parties hereto, and no third party shall have any rights
hereunder.
6. Amendment/Waiver. This Amendment may be modified, amended, supplemented,
and/or rescinded only through an express written instrument signed by all of the
parties or their respective successors and assigns. Any party may specifically
and expressly waive in writing any portion of this Amendment or any breach
hereof, but no such waiver shall constitute a further or continuing waiver of
any preceding of succeeding breach of the same or any other provision. The
consent by one party to any act for which such consent was required shall not be
deemed to imply consent or waiver of the necessity of obtaining such consent for
the same or similar acts in the future.
2
<PAGE> 3
IN WITNESS WHEREOF, the parties have executed and delivered this FIRST
AMENDMENT TO CONSULTING AGREEMENT.
Dated: 6/28/98 Inland Entertainment Corporation
------------------------- a Utah corporation
By: /s/ L. DONALD SPEER, II
-------------------------
L. Donald Speer, II
Chairman of the Board
Dated: 6/26/98 Torrey Pines Consultants, Inc.
------------------------- a California corporation
By: /s/ ARTHUR R. PFIZENMAYER
-------------------------
Arthur R. Pfizenmayer
President
(Signature Page to First Amendment to Consulting Agreement)
3
<PAGE> 1
EXHIBIT 10.19
THIS PROMISSORY NOTE HAS BEEN ISSUED IN CONNECTION WITH A CERTAIN STOCK PURCHASE
AND SETTLEMENT AND RELEASE AGREEMENT DATED SEPTEMBER 27, 1996 BY AND AMONG
INLAND CASINO CORPORATION ("INLAND"), JONATHAN UNGAR AND ALAN HENRY WOODS
(COPIES OF WHICH ARE ON FILE WITH INLAND AND MAY BE OBTAINED FROM THE CORPORATE
SECRETARY OF INLAND) AND HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR REGISTERED OR QUALIFIED UNDER ANY
STATE SECURITIES LAW. ACCORDINGLY, THIS PROMISSORY NOTE MAY NOT BE SOLD,
PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED UNLESS IT HAS FIRST BEEN
REGISTERED UNDER THE SECURITIES ACT AND REGISTERED OR QUALIFIED UNDER ANY
APPLICABLE STATE SECURITIES LAW OR UNLESS INLAND HAS RECEIVED AN OPINION OF
COUNSEL SATISFACTORY TO IT THAT REGISTRATION UNDER THE SECURITIES ACT AND
REGISTRATION OR QUALIFICATION UNDER ANY APPLICABLE STATE SECURITIES LAW IS NOT
REQUIRED.
PROMISSORY NOTE
$1,000,000.00 La Jolla, California September 15, 1997
FOR VALUE RECEIVED, the undersigned, Inland Casino Corporation, a Utah
corporation ("Maker"), hereby promises to pay to the order of Jonathan Ungar, an
individual resident of the State of California ("Payee"), the principal sum of
ONE MILLION DOLLARS ($1,000,000.00) in lawful money of the United States of
America.
1. Interest. The unpaid principal balance of this Promissory Note from
time to time outstanding shall bear interest at the rate of ten percent (10%)
per annum, computed on the basis of a 360-day year for the actual number of days
elapsed.
2. Payments. For the first three (3) years of this Promissory Note,
Maker shall pay to Payee, in annual installments commencing on September 15,
1998, interest only on the unpaid principal balance; thereafter, commencing on
September 15, 2001, Maker shall pay to the order of Payee the principal sum of
$1,000,000 in three annual installments in the following manner: $333,333.33 on
each of September 15, 2001, 2002 and 2003, with interest on the unpaid principal
balance as specified in Section 1 hereof payable with each installment of
principal; provided, however, that Maker only shall be obligated to make an
installment payment under this Promissory Note (a) to the extent of Maker's
unreserved and unrestricted earned surplus and capital surplus as provided in
Article VI of Maker's Articles of Incorporation, and (b) if and to the extent
that such installment payment could be made under Section 16-10a-640 of the Utah
Revised Business Corporation Act or any other similar applicable law, in each
case after giving effect to payments to be made by Maker under that
<PAGE> 2
certain Stock Purchase and Settlement and Release Agreement, dated February 23,
1996, by and between Maker and Jack R. Smith, and after giving effect to
payments to be made by Maker to Payee pursuant to the Ungar Promissory Note and
to Woods pursuant to the Woods Promissory Note, each made pursuant to the Stock
Purchase and Settlement and Release Agreement, dated September 27, 1996, by and
among Maker, Payee, and Alan Henry Woods (the "Stock Purchase Agreement"); and
provided further, that in assessing whether Maker shall be obligated to make an
installment payment under this Promissory Note, Maker shall only be obligated to
make such payment to Payee to the extent that it could make the corresponding
payment to Alan Henry Woods under the Conditional Promissory Notes executed in
favor of Mr. Woods pursuant to the Stock Purchase Agreement. Each of the
above-referenced financial tests shall be made immediately prior to the time an
installment payment is scheduled. To the extent such financial tests are not
met, Maker shall be under no obligation to make such payment and Maker shall not
be deemed to be in default on this Promissory Note. To the extent that any such
installment comes due on a day that is not a business day, such payment shall be
due on the next succeeding business day.
3. Adjusted Payments. Notwithstanding anything to the contrary herein,
to the extent that Maker is unable to make an installment payment under this
Promissory Note because of the reasons set forth in Section 2 herein, Maker
shall assess the amount of funds that it may legally use to make payments to
Payee and Mr. Woods and, to the extent that there are funds available, Maker
shall first make proportional payments of principal and/or interest thereon
(depending upon the type of payment that was scheduled) to Payee and Mr. Woods
to the extent legally permissible; thereafter, the amount of such scheduled
installment that the Company was not obligated to pay pursuant to Section 2
hereof shall be added to the principal amount remaining on this Promissory Note
and future annual payments hereunder will be adjusted accordingly. Such
procedures shall apply to successive years' installment payments until the
entire principal amount of each of Payee's and Mr. Woods' notes are paid in
full, which may extend beyond the anticipated six-year term stated in Section 2
herein.
4. Prepayment of Principal.
(a) Any portion of the principal balance of this Promissory Note may
be repaid from time to time in whole or in part, without penalty, and the amount
of the payments of principal and interest set forth in Section 2 will be
adjusted accordingly; provided, however, that all payments and prepayments made
by the Company under this Promissory Note and the corresponding Woods Promissory
Note shall be proportionate with respect to each such Note.
(b) If the principal balance of this Promissory Note is paid in full
prior to the final installment date, the entire principal balance of this
Promissory Note will be reduced by an amount equal to two percent (2%) for each
full twelve-month period that the principal balance is paid in full prior to the
final installment date. Such reduction of principal shall not
-2-
<PAGE> 3
reduce any interest payments made on this Promissory Note. The amount of such
principal reduction shall be deducted from the final installment payment to be
paid by Maker.
5. Default. If Maker fails to make any installment payment or portion of
a payment when due, and such failure shall continue thirty (30) days after Maker
has received written notice of the default from Payee, all unpaid principal,
together with accrued interest, will become immediately due and payable at the
Option of the Payee. Notwithstanding anything to the contrary herein, this
Promissory Note will not be in default to the extent Maker is not obligated to
make an installment payment of principal and/or interest hereunder for the
reasons set forth in Section 2 herein.
6. This Promissory Note is made pursuant to the Stock Purchase
Agreement. Nothing in this Promissory Note shall be construed in a manner which
is inconsistent with the terms of the Stock Purchase Agreement.
7. Limitation on Interest. Notwithstanding any provision contained in
this Promissory Note to the contrary, no holder hereof shall ever be entitled to
receive, collect, or apply as interest on this Promissory Note any amount in
excess of the highest lawful rate permissible under any law that a court of
competent jurisdiction may deem applicable hereto. If any holder hereof ever
receives, collects, or applies as interest any such excess, the amount that
would be excessive interest shall be deemed to be a partial payment of principal
and treated hereunder as such, and, if the principal balance of this Promissory
Note is paid in full, any remaining excess shall promptly be paid to Maker.
8. Right of Setoff. To the extent that Payee does not meet his
obligations set forth in Section 19 of the Stock Purchase Agreement, Maker, at
its sole election, may reduce the principal amount of this Promissory Note by
the amount of payments not made by Payee pursuant to Section 19 of the Stock
Purchase Agreement. Such right of setoff shall be separate from any other rights
available to the company and shall not effect any right that any individual
director may have against Payee.
9. Successors and Assigns. This Promissory Note shall be binding upon
Maker, its successors and assigns, and shall inure to the benefit of Payee, its
successors and assigns. Notwithstanding anything to the contrary herein, this
Promissory Note shall not be assigned by Payee without the written consent of
Maker in accordance with the provisions of Section 35 of the Stock Purchase
Agreement.
10. Severability. If any one or more of the provisions contained herein
(or parts thereof), or the application thereof in any circumstance, is held
invalid, illegal or unenforceable in any respect for any reason, the validity
and enforceability of any such provision in every other respect and of the
remaining provisions hereof will not be in any way
-3-
<PAGE> 4
impaired or affected, it being intended that all of the rights and privileges
should be enforceable to the fullest extent permitted by law.
11. Business Day. For purposes of this Promissory Note, the term
"business day" shall mean any day of the year other than a Saturday, Sunday or
public or bank holiday in San Diego, California.
12. APPLICABLE LAW. THIS PROMISSORY NOTE SHALL BE GOVERNED BY, AND
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA,
WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICT OF LAWS OF THE STATE OF
CALIFORNIA.
IN WITNESS WHEREOF, Maker has executed this Promissory Note as of the
date first set forth above.
INLAND CASINO CORPORATION
By: /s/ L. DONALD SPEER, II
----------------------------------
L. Donald Speer, II
Chairman of the Board and Chief
Executive Officer, President and
Chief Operating Officer
-4-
<PAGE> 1
EXHIBIT 10.20
THIS PROMISSORY NOTE HAS BEEN ISSUED IN CONNECTION WITH A CERTAIN STOCK PURCHASE
AND SETTLEMENT AND RELEASE AGREEMENT DATED SEPTEMBER 27, 1996 BY AND AMONG
INLAND CASINO CORPORATION ("INLAND"), JONATHAN UNGAR AND ALAN HENRY WOODS
(COPIES OF WHICH ARE ON FILE WITH INLAND AND MAY BE OBTAINED FROM THE CORPORATE
SECRETARY OF INLAND) AND HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR REGISTERED OR QUALIFIED UNDER ANY
STATE SECURITIES LAW AND MAY NOT BE OFFERED OR SOLD IN THE UNITED STATES OR TO A
"U.S. PERSON" (AS DEFINED IN REGULATION S UNDER THE SECURITIES ACT) UNLESS THIS
PROMISSORY NOTE IS REGISTERED UNDER THE SECURITIES ACT. ACCORDINGLY, THIS
PROMISSORY NOTE MAY NOT BE SOLD, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED
UNLESS IT HAS FIRST BEEN REGISTERED UNDER THE SECURITIES ACT AND REGISTERED OR
QUALIFIED UNDER ANY APPLICABLE STATE SECURITIES LAW OR UNLESS INLAND HAS
RECEIVED AN OPINION OF COUNSEL SATISFACTORY TO IT THAT REGISTRATION UNDER THE
SECURITIES ACT AND REGISTRATION OR QUALIFICATION UNDER ANY APPLICABLE STATE
SECURITIES LAW IS NOT REQUIRED.
PROMISSORY NOTE
$1,000,000.00 La Jolla, California September 15, 1997
FOR VALUE RECEIVED, the undersigned, Inland Casino Corporation, a Utah
corporation ("Maker"), hereby promises to pay to the order of Alan Henry Woods,
an individual citizen of Australia and a resident of Hong Kong ("Payee"), the
principal sum of ONE MILLION DOLLARS ($1,000,000.00) in lawful money of the
United States of America.
1. Interest. The unpaid principal balance of this Promissory Note from
time to time outstanding shall bear interest at the rate of ten percent (10%)
per annum, computed on the basis of a 360-day year for the actual number of days
elapsed.
2. Payments. For the first three (3) years of this Promissory Note,
Maker shall pay to Payee, in annual installments commencing on September 15,
1998, interest only on the unpaid principal balance; thereafter, commencing on
September 15, 2001, Maker shall pay to the order of Payee the principal sum of
$1,000,000 in three annual installments in the following manner: $333,333.33 on
each of September 15, 2001, 2002 and 2003, with interest on the unpaid principal
balance as specified in Section 1 hereof payable with each installment of
principal; provided, however, that Maker only shall be obligated to make an
installment payment under this Promissory Note (a) to the extent of Maker's
unreserved and unrestricted
<PAGE> 2
earned surplus and capital surplus as provided in Article VI of Maker's Articles
of Incorporation, and (b) if and to the extent that such installment payment
could be made under Section 16-10a-640 of the Utah Revised Business Corporation
Act or any other similar applicable law, in each case after giving effect to
payments to be made by Maker under that certain Stock Purchase and Settlement
and Release Agreement, dated February 23, 1996, by and between Maker and Jack R.
Smith, and after giving effect to payments to be made by Maker to Payee pursuant
to the Woods Promissory Note and to Ungar pursuant to the Ungar Promissory Note,
each made pursuant to the Stock Purchase and Settlement and Release Agreement,
dated September 27, 1996, by and among Maker, Payee, and Jonathan Ungar (the
"Stock Purchase Agreement"); and provided further, that in assessing whether
Maker shall be obligated to make an installment payment under this Promissory
Note, Maker shall only be obligated to make such payment to Payee to the extent
that it could make the corresponding payment to Jonathan Ungar under the
Conditional Promissory Notes executed in favor of Mr. Ungar pursuant to the
Stock Purchase Agreement. Each of the above-referenced financial tests shall be
made immediately prior to the time an installment payment is scheduled. To the
extent such financial tests are not met, Maker shall be under no obligation to
make such payment and Maker shall not be deemed to be in default on this
Promissory Note. To the extent that any such installment comes due on a day that
is not a business day, such payment shall be due on the next succeeding business
day.
3. Adjusted Payments. Notwithstanding anything to the contrary herein,
to the extent that Maker is unable to make an installment payment under this
Promissory Note because of the reasons set forth in Section 2 herein, Maker
shall assess the amount of funds that it may legally use to make payments to
Payee and Mr. Ungar and, to the extent that there are funds available, Maker
shall first make proportional payments of principal and/or interest thereon
(depending upon the type of payment that was scheduled) to Payee and Mr. Ungar
to the extent legally permissible; thereafter, the amount of such scheduled
installment that the Company was not obligated to pay pursuant to Section 2
hereof shall be added to the principal amount remaining on this Promissory Note
and future annual payments hereunder will be adjusted accordingly. Such
procedures shall apply to successive years' installment payments until the
entire principal amount of each of Payee's and Mr.Ungar's notes are paid in
full, which may extend beyond the anticipated six-year term stated in Section 2
herein.
4. Prepayment of Principal.
(a) Any portion of the principal balance of this Promissory Note may
be repaid from time to time in whole or in part, without penalty, and the amount
of the payments of principal and interest set forth in Section 2 will be
adjusted accordingly; provided, however, that all payments and prepayments made
by the Company under this Promissory Note and the corresponding Ungar Promissory
Note shall be proportionate with respect to each such Note.
-2-
<PAGE> 3
(b) If the principal balance of this Promissory Note is paid in full
prior to the final installment date, the entire principal balance of this
Promissory Note will be reduced by an amount equal to two percent (2%) for each
full twelve-month period that the principal balance is paid in full prior to the
final installment date. Such reduction of principal shall not reduce any
interest payments made on this Promissory Note. The amount of such principal
reduction shall be deducted from the final installment payment to be paid by
Maker.
5. Default. If Maker fails to make any installment payment or portion of
a payment when due, and such failure shall continue thirty (30) days after Maker
has received written notice of the default from Payee, all unpaid principal,
together with accrued interest, will become immediately due and payable at the
Option of the Payee. Notwithstanding anything to the contrary herein, this
Promissory Note will not be in default to the extent Maker is not obligated to
make an installment payment of principal and/or interest hereunder for the
reasons set forth in Section 2 herein.
6. This Promissory Note is made pursuant to the Stock Purchase
Agreement. Nothing in this Promissory Note shall be construed in a manner which
is inconsistent with the terms of the Stock Purchase Agreement.
7. Limitation on Interest. Notwithstanding any provision contained in
this Promissory Note to the contrary, no holder hereof shall ever be entitled to
receive, collect, or apply as interest on this Promissory Note any amount in
excess of the highest lawful rate permissible under any law that a court of
competent jurisdiction may deem applicable hereto. If any holder hereof ever
receives, collects, or applies as interest any such excess, the amount that
would be excessive interest shall be deemed to be a partial payment of principal
and treated hereunder as such, and, if the principal balance of this Promissory
Note is paid in full, any remaining excess shall promptly be paid to Maker.
8. Right of Setoff. To the extent that Payee does not meet his
obligations set forth in Section 19 of the Stock Purchase Agreement, Maker, at
its sole election, may reduce the principal amount of this Promissory Note by
the amount of payments not made by Payee pursuant to Section 19 of the Stock
Purchase Agreement. Such right of setoff shall be separate from any other rights
available to the company and shall not effect any right that any individual
director may have against Payee.
9. Successors and Assigns. This Promissory Note shall be binding upon
Maker, its successors and assigns, and shall inure to the benefit of Payee, its
successors and assigns. Notwithstanding anything to the contrary herein, this
Promissory Note shall not be assigned by Payee without the written consent of
Maker in accordance with the provisions of Section 35 of the Stock Purchase
Agreement.
-3-
<PAGE> 4
10. Severability. If any one or more of the provisions contained herein
(or parts thereof), or the application thereof in any circumstance, is held
invalid, illegal or unenforceable in any respect for any reason, the validity
and enforceability of any such provision in every other respect and of the
remaining provisions hereof will not be in any way impaired or affected, it
being intended that all of the rights and privileges should be enforceable to
the fullest extent permitted by law.
11. Business Day. For purposes of this Promissory Note, the term
"business day" shall mean any day of the year other than a Saturday, Sunday or
public or bank holiday in San Diego, California.
12. APPLICABLE LAW. THIS PROMISSORY NOTE SHALL BE GOVERNED BY, AND
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA,
WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICT OF LAWS OF THE STATE OF
CALIFORNIA.
IN WITNESS WHEREOF, Maker has executed this Promissory Note as of the
date first set forth above.
INLAND CASINO CORPORATION
By: /s/ L. DONALD SPEER, II
-------------------------------------
L. Donald Speer, II
Chairman of the Board and Chief
Executive Officer, President and
Chief Operating Officer
-4-
<PAGE> 1
EXHIBIT 10.21
THIS PROMISSORY NOTE HAS BEEN ISSUED IN CONNECTION WITH A CERTAIN STOCK PURCHASE
AND SETTLEMENT AND RELEASE AGREEMENT DATED SEPTEMBER 27, 1996 BY AND AMONG
INLAND CASINO CORPORATION, NOW KNOWN AS INLAND ENTERTAINMENT CORPORATION
("INLAND"), JONATHAN UNGAR AND ALAN HENRY WOODS (COPIES OF WHICH ARE ON FILE
WITH INLAND AND MAY BE OBTAINED FROM THE CORPORATE SECRETARY OF INLAND) AND HAS
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR REGISTERED OR QUALIFIED UNDER ANY STATE SECURITIES LAW.
ACCORDINGLY, THIS PROMISSORY NOTE MAY NOT BE SOLD, PLEDGED, HYPOTHECATED, OR
OTHERWISE TRANSFERRED UNLESS IT HAS FIRST BEEN REGISTERED UNDER THE SECURITIES
ACT AND REGISTERED OR QUALIFIED UNDER ANY APPLICABLE STATE SECURITIES LAW OR
UNLESS INLAND HAS RECEIVED AN OPINION OF COUNSEL SATISFACTORY TO IT THAT
REGISTRATION UNDER THE SECURITIES ACT AND REGISTRATION OR QUALIFICATION UNDER
ANY APPLICABLE STATE SECURITIES LAW IS NOT REQUIRED.
PROMISSORY NOTE
$1,000,000.00 San Diego, California September 15, 1998
FOR VALUE RECEIVED, the undersigned, Inland Entertainment Corporation, a
Utah corporation, formerly known as Inland Casino Corporation ("Maker"), hereby
promises to pay to the order of Jonathan Ungar, an individual resident of the
State of California ("Payee"), the principal sum of ONE MILLION DOLLARS
($1,000,000.00) in lawful money of the United States of America.
1. Interest. The unpaid principal balance of this Promissory Note from
time to time outstanding shall bear interest at the rate of ten percent (10%)
per annum, computed on the basis of a 360-day year for the actual number of days
elapsed.
2. Payments. For the first three (3) years of this Promissory Note,
Maker shall pay to Payee, in annual installments commencing on September 15,
1998, interest only on the unpaid principal balance; thereafter, commencing on
September 15, 2001, Maker shall pay to the order of Payee the principal sum of
$1,000,000 in three annual installments in the following manner: $333,333.33 on
each of September 15, 2002, 2003 and 2004, with interest on the unpaid principal
balance as specified in Section 1 hereof payable with each installment of
principal; provided, however, that Maker only shall be obligated to make an
installment payment under this Promissory Note (a) to the extent of Maker's
unreserved and unrestricted earned surplus and capital surplus as provided in
Article VI of Maker's Articles of Incorporation, and (b) if and to the extent
that such installment payment could be made under Section 16-10a-640 of the Utah
Revised Business Corporation Act or any other similar applicable law, in each
case after giving effect to payments to be made by Maker under that
<PAGE> 2
certain Stock Purchase and Settlement and Release Agreement, dated February 23,
1996, by and between Maker and Jack R. Smith, and after giving effect to
payments to be made by Maker to Payee pursuant to the Ungar Promissory Note and
to Woods pursuant to the Woods Promissory Note, each made pursuant to the Stock
Purchase and Settlement and Release Agreement, dated September 27, 1996, by and
among Maker, Payee, and Alan Henry Woods (the "Stock Purchase Agreement"); and
provided further, that in assessing whether Maker shall be obligated to make an
installment payment under this Promissory Note, Maker shall only be obligated to
make such payment to Payee to the extent that it could make the corresponding
payment to Alan Henry Woods under the Conditional Promissory Notes executed in
favor of Mr. Woods pursuant to the Stock Purchase Agreement. Each of the
above-referenced financial tests shall be made immediately prior to the time an
installment payment is scheduled. To the extent such financial tests are not
met, Maker shall be under no obligation to make such payment and Maker shall not
be deemed to be in default on this Promissory Note. To the extent that any such
installment comes due on a day that is not a business day, such payment shall be
due on the next succeeding business day.
3. Adjusted Payments. Notwithstanding anything to the contrary herein,
to the extent that Maker is unable to make an installment payment under this
Promissory Note because of the reasons set forth in Section 2 herein, Maker
shall assess the amount of funds that it may legally use to make payments to
Payee and Mr. Woods and, to the extent that there are funds available, Maker
shall first make proportional payments of principal and/or interest thereon
(depending upon the type of payment that was scheduled) to Payee and Mr. Woods
to the extent legally permissible; thereafter, the amount of such scheduled
installment that the Company was not obligated to pay pursuant to Section 2
hereof shall be added to the principal amount remaining on this Promissory Note
and future annual payments hereunder will be adjusted accordingly. Such
procedures shall apply to successive years' installment payments until the
entire principal amount of each of Payee's and Mr. Woods' notes are paid in
full, which may extend beyond the anticipated six-year term stated in Section 2
herein.
4. Prepayment of Principal.
(a) Any portion of the principal balance of this Promissory Note may
be repaid from time to time in whole or in part, without penalty, and the amount
of the payments of principal and interest set forth in Section 2 will be
adjusted accordingly; provided, however, that all payments and prepayments made
by the Company under this Promissory Note and the corresponding Woods Promissory
Note shall be proportionate with respect to each such Note.
(b) If the principal balance of this Promissory Note is paid in full
prior to the final installment date, the entire principal balance of this
Promissory Note will be reduced by an amount equal to two percent (2%) for each
full twelve-month period that the principal balance is paid in full prior to the
final installment date. Such reduction of principal shall not
-2-
<PAGE> 3
reduce any interest payments made on this Promissory Note. The amount of such
principal reduction shall be deducted from the final installment payment to be
paid by Maker.
5. Default. If Maker fails to make any installment payment or portion of
a payment when due, and such failure shall continue thirty (30) days after Maker
has received written notice of the default from Payee, all unpaid principal,
together with accrued interest, will become immediately due and payable at the
Option of the Payee. Notwithstanding anything to the contrary herein, this
Promissory Note will not be in default to the extent Maker is not obligated to
make an installment payment of principal and/or interest hereunder for the
reasons set forth in Section 2 herein.
6. This Promissory Note is made pursuant to the Stock Purchase
Agreement. Nothing in this Promissory Note shall be construed in a manner which
is inconsistent with the terms of the Stock Purchase Agreement.
7. Limitation on Interest. Notwithstanding any provision contained in
this Promissory Note to the contrary, no holder hereof shall ever be entitled to
receive, collect, or apply as interest on this Promissory Note any amount in
excess of the highest lawful rate permissible under any law that a court of
competent jurisdiction may deem applicable hereto. If any holder hereof ever
receives, collects, or applies as interest any such excess, the amount that
would be excessive interest shall be deemed to be a partial payment of principal
and treated hereunder as such, and, if the principal balance of this Promissory
Note is paid in full, any remaining excess shall promptly be paid to Maker.
8. Right of Setoff. To the extent that Payee does not meet his
obligations set forth in Section 19 of the Stock Purchase Agreement, Maker, at
its sole election, may reduce the principal amount of this Promissory Note by
the amount of payments not made by Payee pursuant to Section 19 of the Stock
Purchase Agreement. Such right of setoff shall be separate from any other rights
available to the company and shall not effect any right that any individual
director may have against Payee.
9. Successors and Assigns. This Promissory Note shall be binding upon
Maker, its successors and assigns, and shall inure to the benefit of Payee, its
successors and assigns. Notwithstanding anything to the contrary herein, this
Promissory Note shall not be assigned by Payee without the written consent of
Maker in accordance with the provisions of Section 35 of the Stock Purchase
Agreement.
10. Severability. If any one or more of the provisions contained herein
(or parts thereof), or the application thereof in any circumstance, is held
invalid, illegal or unenforceable in any respect for any reason, the validity
and enforceability of any such provision in every other respect and of the
remaining provisions hereof will not be in any way
-3-
<PAGE> 4
impaired or affected, it being intended that all of the rights and privileges
should be enforceable to the fullest extent permitted by law.
11. Business Day. For purposes of this Promissory Note, the term
"business day" shall mean any day of the year other than a Saturday, Sunday or
public or bank holiday in San Diego, California.
12. APPLICABLE LAW. THIS PROMISSORY NOTE SHALL BE GOVERNED BY, AND
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA,
WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICT OF LAWS OF THE STATE OF
CALIFORNIA.
IN WITNESS WHEREOF, Maker has executed this Promissory Note as of the
date first set forth above.
INLAND ENTERTAINMENT CORPORATION
By: /s/ L. DONALD SPEER, II
----------------------------------
L. Donald Speer, II
Chairman of the Board and Chief
Executive Officer, President and
Chief Operating Officer
-4-
<PAGE> 1
EXHIBIT 10.22
THIS PROMISSORY NOTE HAS BEEN ISSUED IN CONNECTION WITH A CERTAIN STOCK PURCHASE
AND SETTLEMENT AND RELEASE AGREEMENT DATED SEPTEMBER 27, 1996 BY AND AMONG
INLAND CASINO CORPORATION, NOW KNOWN AS INLAND ENTERTAINMENT CORPORATION
("INLAND"), JONATHAN UNGAR AND ALAN HENRY WOODS (COPIES OF WHICH ARE ON FILE
WITH INLAND AND MAY BE OBTAINED FROM THE CORPORATE SECRETARY OF INLAND) AND HAS
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR REGISTERED OR QUALIFIED UNDER ANY STATE SECURITIES LAW AND
MAY NOT BE OFFERED OR SOLD IN THE UNITED STATES OR TO A "U.S. PERSON" (AS
DEFINED IN REGULATION S UNDER THE SECURITIES ACT) UNLESS THIS PROMISSORY NOTE IS
REGISTERED UNDER THE SECURITIES ACT. ACCORDINGLY, THIS PROMISSORY NOTE MAY NOT
BE SOLD, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED UNLESS IT HAS FIRST
BEEN REGISTERED UNDER THE SECURITIES ACT AND REGISTERED OR QUALIFIED UNDER ANY
APPLICABLE STATE SECURITIES LAW OR UNLESS INLAND HAS RECEIVED AN OPINION OF
COUNSEL SATISFACTORY TO IT THAT REGISTRATION UNDER THE SECURITIES ACT AND
REGISTRATION OR QUALIFICATION UNDER ANY APPLICABLE STATE SECURITIES LAW IS NOT
REQUIRED.
PROMISSORY NOTE
$1,000,000.00 San Diego, California September 15, 1998
FOR VALUE RECEIVED, the undersigned, Inland Entertainment Corporation, a
Utah corporation, formerly known as Inland Casino Corporation ("Maker"), hereby
promises to pay to the order of Alan Henry Woods, an individual citizen of
Australia and a resident of Hong Kong ("Payee"), the principal sum of ONE
MILLION DOLLARS ($1,000,000.00) in lawful money of the United States of America.
1. Interest. The unpaid principal balance of this Promissory Note from
time to time outstanding shall bear interest at the rate of ten percent (10%)
per annum, computed on the basis of a 360-day year for the actual number of days
elapsed.
2. Payments. For the first three (3) years of this Promissory Note,
Maker shall pay to Payee, in annual installments commencing on September 15,
1998, interest only on the unpaid principal balance; thereafter, commencing on
September 15, 2001, Maker shall pay to the order of Payee the principal sum of
$1,000,000 in three annual installments in the following manner: $333,333.33 on
each of September 15, 2002, 2003 and 2004, with interest on the unpaid principal
balance as specified in Section 1 hereof payable with each installment of
principal; provided, however, that Maker only shall be obligated to make an
installment payment under this Promissory Note (a) to the extent of Maker's
unreserved and unrestricted
<PAGE> 2
earned surplus and capital surplus as provided in Article VI of Maker's Articles
of Incorporation, and (b) if and to the extent that such installment payment
could be made under Section 16-10a-640 of the Utah Revised Business Corporation
Act or any other similar applicable law, in each case after giving effect to
payments to be made by Maker under that certain Stock Purchase and Settlement
and Release Agreement, dated February 23, 1996, by and between Maker and Jack R.
Smith, and after giving effect to payments to be made by Maker to Payee pursuant
to the Woods Promissory Note and to Ungar pursuant to the Ungar Promissory Note,
each made pursuant to the Stock Purchase and Settlement and Release Agreement,
dated September 27, 1996, by and among Maker, Payee, and Jonathan Ungar (the
"Stock Purchase Agreement"); and provided further, that in assessing whether
Maker shall be obligated to make an installment payment under this Promissory
Note, Maker shall only be obligated to make such payment to Payee to the extent
that it could make the corresponding payment to Jonathan Ungar under the
Conditional Promissory Notes executed in favor of Mr. Ungar pursuant to the
Stock Purchase Agreement. Each of the above-referenced financial tests shall be
made immediately prior to the time an installment payment is scheduled. To the
extent such financial tests are not met, Maker shall be under no obligation to
make such payment and Maker shall not be deemed to be in default on this
Promissory Note. To the extent that any such installment comes due on a day that
is not a business day, such payment shall be due on the next succeeding business
day.
3. Adjusted Payments. Notwithstanding anything to the contrary herein,
to the extent that Maker is unable to make an installment payment under this
Promissory Note because of the reasons set forth in Section 2 herein, Maker
shall assess the amount of funds that it may legally use to make payments to
Payee and Mr. Ungar and, to the extent that there are funds available, Maker
shall first make proportional payments of principal and/or interest thereon
(depending upon the type of payment that was scheduled) to Payee and Mr. Ungar
to the extent legally permissible; thereafter, the amount of such scheduled
installment that the Company was not obligated to pay pursuant to Section 2
hereof shall be added to the principal amount remaining on this Promissory Note
and future annual payments hereunder will be adjusted accordingly. Such
procedures shall apply to successive years' installment payments until the
entire principal amount of each of Payee's and Mr.Ungar's notes are paid in
full, which may extend beyond the anticipated six-year term stated in Section 2
herein.
4. Prepayment of Principal.
(a) Any portion of the principal balance of this Promissory Note may
be repaid from time to time in whole or in part, without penalty, and the amount
of the payments of principal and interest set forth in Section 2 will be
adjusted accordingly; provided, however, that all payments and prepayments made
by the Company under this Promissory Note and the corresponding Ungar Promissory
Note shall be proportionate with respect to each such Note.
-2-
<PAGE> 3
(b) If the principal balance of this Promissory Note is paid in full
prior to the final installment date, the entire principal balance of this
Promissory Note will be reduced by an amount equal to two percent (2%) for each
full twelve-month period that the principal balance is paid in full prior to the
final installment date. Such reduction of principal shall not reduce any
interest payments made on this Promissory Note. The amount of such principal
reduction shall be deducted from the final installment payment to be paid by
Maker.
5. Default. If Maker fails to make any installment payment or portion of
a payment when due, and such failure shall continue thirty (30) days after Maker
has received written notice of the default from Payee, all unpaid principal,
together with accrued interest, will become immediately due and payable at the
Option of the Payee. Notwithstanding anything to the contrary herein, this
Promissory Note will not be in default to the extent Maker is not obligated to
make an installment payment of principal and/or interest hereunder for the
reasons set forth in Section 2 herein.
6. This Promissory Note is made pursuant to the Stock Purchase
Agreement. Nothing in this Promissory Note shall be construed in a manner which
is inconsistent with the terms of the Stock Purchase Agreement.
7. Limitation on Interest. Notwithstanding any provision contained in
this Promissory Note to the contrary, no holder hereof shall ever be entitled to
receive, collect, or apply as interest on this Promissory Note any amount in
excess of the highest lawful rate permissible under any law that a court of
competent jurisdiction may deem applicable hereto. If any holder hereof ever
receives, collects, or applies as interest any such excess, the amount that
would be excessive interest shall be deemed to be a partial payment of principal
and treated hereunder as such, and, if the principal balance of this Promissory
Note is paid in full, any remaining excess shall promptly be paid to Maker.
8. Right of Setoff. To the extent that Payee does not meet his
obligations set forth in Section 19 of the Stock Purchase Agreement, Maker, at
its sole election, may reduce the principal amount of this Promissory Note by
the amount of payments not made by Payee pursuant to Section 19 of the Stock
Purchase Agreement. Such right of setoff shall be separate from any other rights
available to the company and shall not effect any right that any individual
director may have against Payee.
9. Successors and Assigns. This Promissory Note shall be binding upon
Maker, its successors and assigns, and shall inure to the benefit of Payee, its
successors and assigns. Notwithstanding anything to the contrary herein, this
Promissory Note shall not be assigned by Payee without the written consent of
Maker in accordance with the provisions of Section 35 of the Stock Purchase
Agreement.
-3-
<PAGE> 4
10. Severability. If any one or more of the provisions contained herein
(or parts thereof), or the application thereof in any circumstance, is held
invalid, illegal or unenforceable in any respect for any reason, the validity
and enforceability of any such provision in every other respect and of the
remaining provisions hereof will not be in any way impaired or affected, it
being intended that all of the rights and privileges should be enforceable to
the fullest extent permitted by law.
11. Business Day. For purposes of this Promissory Note, the term
"business day" shall mean any day of the year other than a Saturday, Sunday or
public or bank holiday in San Diego, California.
12. APPLICABLE LAW. THIS PROMISSORY NOTE SHALL BE GOVERNED BY, AND
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA,
WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICT OF LAWS OF THE STATE OF
CALIFORNIA.
IN WITNESS WHEREOF, Maker has executed this Promissory Note as of the
date first set forth above.
INLAND ENTERTAINMENT CORPORATION
By: /s/ L. DONALD SPEER, II
-------------------------------------
L. Donald Speer, II
Chairman of the Board and Chief
Executive Officer, President and
Chief Operating Officer
-4-
<PAGE> 1
EXHIBIT - 21
SUBSIDIARIES OF THE REGISTRANT
NAME* JURISDICTION OF ORGANIZATION
Cyberworks, Inc. California, U.S.A.
Worldwide Media Holdings, N.V. Curacao, Netherland Antilles
* Each subsidiary is wholly-owned by the Registrant and does business only under
the name stated herein.
<PAGE> 1
EXHIBIT - 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated August 7, 1998, accompanying the financial
statements included in the Annual Report of Inland Entertainment Corporation on
Form 10-KSB for the year ended June 30, 1998. We hereby consent to the
incorporation by reference of said report in the Registration Statements of
Inland Entertainment Corporation of Form S-8 (File Nos. 333-19743, effective
January 14, 1997, 333-19745, effective January 14, 1997, 333-19747, effective
January 14, 1997 and 333-44179 effective January 13, 1998).
/s/ GRANT THORNTON LLP
Los Angeles, California
September 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 9,205,502
<SECURITIES> 1,867,667
<RECEIVABLES> 51,644
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 11,283,837
<PP&E> 1,246,507
<DEPRECIATION> 222,887
<TOTAL-ASSETS> 19,273,555
<CURRENT-LIABILITIES> 4,375,654
<BONDS> 8,300,000
0
0
<COMMON> 3,924
<OTHER-SE> 6,593,977
<TOTAL-LIABILITY-AND-EQUITY> 19,273,555
<SALES> 14,647,460
<TOTAL-REVENUES> 15,295,775
<CGS> 0
<TOTAL-COSTS> 10,600,919
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 538,040
<INCOME-PRETAX> 4,156,816
<INCOME-TAX> 1,760,879
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,395,937
<EPS-PRIMARY> .62
<EPS-DILUTED> .54
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 8,783,052
<SECURITIES> 0
<RECEIVABLES> 104,844
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,015,549
<PP&E> 508,402
<DEPRECIATION> 108,540
<TOTAL-ASSETS> 17,304,797
<CURRENT-LIABILITIES> 4,087,785
<BONDS> 6,700,000
0
0
<COMMON> 3,855
<OTHER-SE> 6,513,154
<TOTAL-LIABILITY-AND-EQUITY> 17,304,797
<SALES> 3,932,000
<TOTAL-REVENUES> 3,932,000
<CGS> 0
<TOTAL-COSTS> 2,835,165
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 102,319
<INCOME-PRETAX> 1,140,823
<INCOME-TAX> 509,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 631,823
<EPS-PRIMARY> .16<F1>
<EPS-DILUTED> .15<F2>
<FN>
<F1>EPS IS REPORTED AS "BASIC EPS" AS PRESCRIBED BY SFAS NO. 128.
<F2>EPS IS REPORTED AS "DILUTED EPS" AS PRESCRIBED BY SFAS NO. 128.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS YEAR
<FISCAL-YEAR-END> JUN-30-1997 JUN-30-1997 JUN-30-1997 JUN-30-1997
<PERIOD-START> JUL-01-1996 JUL-01-1996 JUL-01-1997 JUL-01-1996
<PERIOD-END> SEP-30-1996 DEC-31-1996 MAR-31-1997 JUN-30-1997
<CASH> 6,106,028 3,492,340 5,486,015 8,004,078
<SECURITIES> 0 0 0 0
<RECEIVABLES> 313,592 1,602,983 189,607 70,100
<ALLOWANCES> 0 0 0 0
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 6,504,662 5,224,957 5,815,842 8,132,247
<PP&E> 203,037 244,222 248,804 248,804
<DEPRECIATION> 47,666 61,026 75,047 89,171
<TOTAL-ASSETS> 13,216,239 14,234,316 14,531,752 16,714,127
<CURRENT-LIABILITIES> 4,177,019 4,639,134 4,091,193 4,359,350
<BONDS> 4,120,054 4,120,054 3,820,511 6,469,591
0 0 0 0
0 0 0 0
<COMMON> 3,855 3,855 3,855 3,855
<OTHER-SE> 4,915,312 5,471,273 6,616,193 5,881,331
<TOTAL-LIABILITY-AND-EQUITY> 13,216,239 14,234,316 14,531,752 16,714,127
<SALES> 3,950,000 7,758,317 12,059,980 16,665,350
<TOTAL-REVENUES> 3,950,000 7,758,317 12,059,980 17,019,466
<CGS> 0 0 0 0
<TOTAL-COSTS> 2,482,762 5,306,714 7,719,943 10,412,056
<OTHER-EXPENSES> 0 0 0 0
<LOSS-PROVISION> 241,091 379,241 444,143 540,151
<INTEREST-EXPENSE> 15,750 119,000 222,250 320,250
<INCOME-PRETAX> 1,508,141 2,466,100 4,345,020 6,287,160
<INCOME-TAX> 715,000 1,117,000 1,851,000 2,528,000
<INCOME-CONTINUING> 793,141 1,349,100 2,494,020 3,759,160
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 793,141 1,349,100 2,494,020 3,759,160
<EPS-PRIMARY> .07<F1> .19<F1> .41<F1> .67<F1>
<EPS-DILUTED> .07<F2> .18<F2> .40<F2> .66<F2>
<FN>
<F1>EPS IS REPORTED AS "BASIC EPS" AS PRESERIBED BY SFAS NO. 128.
<F2>EPS IS REPORTED AS "DILUTED EPS" AS PRESCRIBED BY SFAS NO. 128.
</FN>
</TABLE>
