<PAGE> 1
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended: March 31, 1999
[ ] 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
(Exact name of small business issuer as specified 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)
Issuer's telephone number: (619) 716-2100
Not Applicable
--------------
(Former name, former address and former fiscal year, if changed since last
report)
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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: as of May 5, 1999, 4,752,286
shares of common stock, $.001 par value per share, were outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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INLAND ENTERTAINMENT CORPORATION
FORM 10-QSB
FOR THE PERIOD ENDED MARCH 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited):
Consolidated Balance Sheets -
June 30, 1998 and March 31, 1999.......................... 3
Consolidated Statements of Operations -
Three months ended March 31, 1999 and 1998................ 4
Nine months ended March 31, 1999 and 1998................. 5
Consolidated Statements of Cash Flows -
Nine months ended March 31, 1999 and 1998................. 6
Notes to Interim Consolidated Financial Statements........ 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION................................................. 11
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................... 21
SIGNATURES............................................................. 22
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
INLAND ENTERTAINMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, 1999 and June 30, 1998
<TABLE>
<CAPTION>
March 31, 1999 June 30, 1998
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,461,211 $ 9,205,502
Short term investments 651,114 1,876,667
Accounts receivable 527,875 51,644
Prepaid expenses and other current assets 227,766 150,024
Due from Barona Casino - expansion project 2,440,146 --
------------ ------------
Total current assets 11,308,112 11,283,837
NONCURRENT ASSETS:
Restricted cash and other investments 2,115,320 2,115,320
Employee and other receivables due after one year 321,270 478,756
Property, plant and equipment, net 1,145,189 1,023,620
Deferred contract costs, net 3,352,543 3,855,427
Deferred taxes 167,982 127,982
Goodwill, net of amortization 3,516,721 --
Deposits and other assets 355,304 388,613
------------ ------------
Total noncurrent assets 10,974,329 7,989,718
------------ ------------
Total assets $ 22,282,441 $ 19,273,555
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Advances of future consulting fees -- Barona Casino $ 2,555,181 $ 2,596,930
Current portion of long-term debt 400,000 400,000
Deferred revenues 183,228 --
Accounts payable and accrued expenses 1,134,739 1,150,380
Income taxes payable 252,724 228,344
------------ ------------
Total current liabilities 4,525,872 4,375,654
LONG-TERM DEBT, LESS CURRENT PORTION 7,900,000 8,300,000
------------ ------------
Total liabilities 12,425,872 12,675,654
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value, 100,000,000 shares
authorized and 4,752,286 shares outstanding 4,752 3,924
Additional paid in capital 3,322,485 --
Retained earnings 6,573,083 6,683,977
Deferred compensation (43,751) (90,000)
------------ ------------
Total shareholders' equity 9,856,569 6,597,901
------------ ------------
Total liabilities and shareholders' equity $ 22,282,441 $ 19,273,555
============ ============
</TABLE>
3
<PAGE> 4
INLAND ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31,
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
REVENUE
Indian Gaming Consulting $ 3,582,000 $ 3,782,500
Other 625,186 --
------------ ------------
4,207,186 3,782,500
------------ ------------
OPERATING EXPENSES:
General and administrative expenses 2,816,841 2,006,464
Amortization of deferred contract costs 167,628 407,095
------------ ------------
2,984,469 2,413,559
------------ ------------
Operating profit 1,222,717 1,368,941
Other income and (expense):
Interest income 128,551 145,931
Interest expense (187,500) (137,499)
------------ ------------
(58,949) 8,432
------------ ------------
Income before income taxes 1,163,768 1,377,373
Income tax provision 465,000 561,000
------------ ------------
Net income $ 698,768 $ 816,373
============ ============
Net income per share - basic $ 0.15 $ 0.21
============ ============
Net income per share - diluted $ 0.13 $ 0.21
============ ============
Shares used in the computation of net income
per share - basic 4,747,194 3,887,015
============ ============
Shares used in the computation of net income
per share - diluted 5,181,401 3,962,093
============ ============
</TABLE>
4
<PAGE> 5
INLAND ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Nine Months Ended March 31,
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
REVENUE
Indian Gaming Consulting $ 9,802,099 $ 10,575,000
Other 1,246,427 190,469
------------ ------------
11,048,526 10,765,469
------------ ------------
OPERATING EXPENSES:
General and administrative expenses 10,016,409 6,050,788
Amortization of deferred contract costs 502,884 2,165,888
------------ ------------
10,519,293 8,216,676
------------ ------------
Operating profit 529,233 2,548,793
Other income and (expense):
Interest income 477,706 454,285
Interest expense (520,833) (400,540)
------------ ------------
(43,127) 53,745
------------ ------------
Income before income taxes 486,106 2,602,538
Income tax provision 597,000 1,108,000
------------ ------------
Net income/(loss) $ (110,894) $ 1,494,538
============ ============
Earnings/(loss) per share - basic $ (0.02) $ 0.39
============ ============
Earnings/(loss) per share - diluted $ (0.02) $ 0.36
============ ============
Shares used in the computation of income
per share - basic 4,556,804 3,872,971
============ ============
Shares used in the computation of income
per share - diluted 4,556,804 4,199,846
============ ============
</TABLE>
5
<PAGE> 6
INLAND ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended March 31,
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Net cash generated by (used in) operating activities:
Net income/(loss) $ (110,894) $ 1,494,538
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 945,042 2,279,022
Provision for bad debts 173,181 --
Deferred taxes (40,000) 218,000
Compensation for granting of non-employee stock options 82,149 --
Due from Barona Casino - expansion project (2,440,146) --
Changes in operating assets and liabilities (424,902) (501,981)
------------ ------------
Net cash provided by (used in) operating activities (1,815,570) 3,489,579
------------ ------------
Cash flows provided by (used) in investing activities:
Purchase of Cyberworks, Inc. (742,530) --
Maturity of short-term investments 1,876,667 --
Purchase of short-term investments (651,114) --
Purchase of furniture and equipment (266,643) (954,469)
Loans to employees 6,475 (132,462)
Investments/other loans 6,011 (108,669)
Deferred contract costs -- (115,511)
Acquisition of restricted cash -- (133,000)
------------ ------------
Net cash provided by (used in) investing activities 228,866 (1,444,111)
------------ ------------
Cash flows provided by (used in) financing activities:
Payment of notes payable (400,000) (1,020,054)
Proceeds from exercise of stock options 242,413 122,315
------------ ------------
Net cash used in financing activities (157,587) (897,739)
------------ ------------
Increase/(decrease) in cash (1,744,291) 1,147,729
Cash, beginning of period 9,205,502 8,004,078
------------ ------------
Cash, end of period $ 7,461,211 $ 9,151,807
============ ============
Supplemental disclosures of cash flow information:
Interest expense paid $ 532,655 $ 400,942
============ ============
Income taxes paid $ 606,000 $ 718,308
============ ============
Non-cash investing and financing activities:
Acquisition of Cyberworks, Inc.
Fair value of tangible assets $ 244,226
Goodwill 3,732,094
Liabilities assumed (188,790)
Stock issued (750,000 shares) (3,045,000)
------------
Cash paid $ 742,530
============
</TABLE>
6
<PAGE> 7
INLAND ENTERTAINMENT CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
1. PRESENTATION OF INTERIM CONSOLIDATED FINANCIAL INFORMATION. The accompanying
interim unaudited consolidated financial statements have been prepared by Inland
Entertainment Corporation and its subsidiaries Cyberworks, Inc. and Worldwide
Media Holdings, N.V., (collectively the "Company" or "Inland"), in conformity
with generally accepted accounting principles for interim financial information
and with the rules and regulations of the U.S. Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such regulations. The
interim unaudited consolidated financial statements reflect all normal,
recurring adjustments and disclosures which are, in the opinion of management,
necessary for a fair presentation. The interim unaudited consolidated financial
statements should be read in conjunction with the Company's Annual Report on
Form 10-KSB for the fiscal year ended June 30, 1998 and the Current Report on
Form 8-K dated September 10, 1998. Current and future financial statements may
not be directly comparable to the Company's historical financial statements. The
results of operations for the interim period are not necessarily indicative of
the results to be expected for the full year.
2. BARONA CONSULTING AGREEMENT. The Company has provided services to the Barona
Group of Capitan Grande Band of Mission Indians (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.
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 letter stated that additional review would be
necessary to make such a determination. In March 1999, the NIGC started a
preliminary review of the relationship between the Barona Tribe and the Company,
which will include a review of the Barona Consulting Agreement. The review is
currently pending.
The Company believes that the Amended and Restated Consulting Agreement (and the
Modification) 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 (iv) 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 Barona Consulting Agreement is not a management
contract. The failure of the NIGC to determine that the Barona Consulting
Agreement is not a management contract could have a material adverse effect on
the business and financial
7
<PAGE> 8
INLAND ENTERTAINMENT CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
condition of the Company. If the NIGC concludes that the Barona Consulting
Agreement is not a management agreement, the NIGC will forward such Agreement to
the BIA for its review. If the BIA determines that its approval is required,
there can be no assurance that the BIA will approve the Barona Consulting
Agreement, and such failure to approve such Agreement may have a material
adverse effect on the business and financial condition of the Company.
3. TRIBAL-STATE COMPACT. In August 1998, a Tribal-State Compact was entered into
between the State of California and the Barona Tribe (the "Barona Compact").
Management believes that the Barona 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 the Governor of California and the Chairman of
the Barona Tribe on August 12, 1998; thereafter, the Barona Tribal Council voted
to submit the Barona Compact to the U.S. Secretary of the Interior (the
"Secretary"). The Secretary's approval of the Barona Compact was published in
the Federal Register on October 22, 1998; however, the State of California (the
"State") has requested that the Barona Compact not become effective at this
time. It is undeterminable when the State will implement the effective date of
the Barona Compact.
The initial term of the Barona Compact indicates a termination date of January
1, 2009, with an option for the Barona Tribe 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.
In contrast to the electronic gaming machines currently in play at the Barona
Casino, the Barona Compact permits the following two Indian Lottery Games: (i)
Indian Video Lottery Match Game and (ii) Indian Video Lottery Scratcher Game.
These games are based upon the concept that casino patrons are playing against
one another and not the "house", since California prohibits house-banked games
of any kind. The Barona Tribe is allowed to operate 1,057 machines, but, similar
to other tribes, has been allocated only 199 machines. To achieve the maximum
number of gaming machines permissible, the balance of the machines must be
licensed by the Barona Tribe from other Federally recognized tribes in
California for an annual fee not to exceed $5,000 per machine.
The Barona Tribe has been permitted to operate its existing 1,057 electronic
gaming devices since the Indian Lottery Games are not commercially available to
the tribes. At the present time, there are a limited number of prototype Indian
Lottery devices (machines) being tested at the Barona Casino as well as at a few
other Indian gaming facilities in Northern California. The time limitation for
conversion is unknown if the Indian Lottery devices are not certified for
operation to the tribes or are not commercially available. There are currently
plans to expand this testing at the Barona Casino in the upcoming year, which
has been agreed to by the State. 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
operations at the Barona Casino may have a material adverse impact on the fees
paid to the Company under the Consulting Agreement.
Additionally, under the Barona Compact, employees 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.
8
<PAGE> 9
INLAND ENTERTAINMENT CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
In August 1998, the California Legislature passed legislation ("AB489")
specifically authorizing the Governor of the State of California to execute the
various compacts which had been negotiated between the State of California and
Indian tribes, including, the Barona Tribe. As a non-urgency measure, AB489 was
scheduled to go into effect on January 1, 1999; however, a referendum petition
to overturn AB489 qualified for the next general election ballot, anticipated to
be in March 2000. The effect of qualifying such referendum provision is that
AB489 did not become effective and will not become effective until the voters of
California vote to uphold AB489. Accordingly, there is a legal question as to
whether the Governor's signature on the Compact between the Barona Tribe and the
State of California is sufficient.
4. DUE FROM BARONA CASINO - EXPANSION PROJECT. The Barona Tribe is
currently in the planning stages of an approximately $120 million expansion
project which includes the acquisition of the Indian Lottery devices required by
the Barona Compact. The Company is in the process of assisting the Barona Casino
in obtaining outside financing for the project. The Company plans to share in
funding the expansion costs incurred with the Barona Tribe prior to the time
that the Barona Tribe obtains such outside financing. The Company expects to
commit approximately $7,000,000 as an unsecured, non-interest-bearing advance to
the Barona Casino. As of March 31, 1999, the Company has advanced $2,440,146;
these advances have been, and will be, accounted for as a receivable from the
Barona Casino to the Company. Payment of the receivable is expected to occur
when the Barona Tribe obtains outside financing which is expected to be sometime
in early fiscal 2000. Of the $2,440,146 receivable balance, approximately
$1,100,000 relates to funding of the original design concepts that have been
changed significantly. The Company may consider absorbing (without
reimbursement) a portion of these original design costs; however, no decision
has been made at this time. If the Company ultimately decides to absorb some or
all of these advances, they will be charged to expense at that time.
Accordingly, no allowance has been established for such portion of the
receivable at March 31, 1999.
5. ACQUISITION. On August 27, 1998, the Company acquired all of the outstanding
shares of Cyberworks Inc., a California corporation ("Cyberworks"), an Internet
marketing and web site 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 is being operated as a wholly-owned
subsidiary of the Company. The acquisition was accounted for as a purchase and
the accounts of Cyberworks have been included in the accompanying financial
statements for the period August 27, 1998 to March 31, 1999.
The excess of the total acquisition cost over the fair value of net assets
acquired ("goodwill") will be amortized on a straight-line basis over 10 years.
Goodwill net of amortization as of March 31, 1999 is $3,516,721 and amortization
expense of $215,373 has been recorded through March 31, 1999. On an ongoing
basis, the Company will review the valuation and recoverability of the
unamortized goodwill costs and will expense all or any portion of unamortized
goodwill determined necessary for fair statement.
The following unaudited pro forma consolidated results of operations assume that
the purchase occurred on July 1, 1997:
<TABLE>
<CAPTION>
YEAR-TO-DATE ENDED MARCH 31,
1999 1998
----------- -----------
<S> <C> <C>
Revenues $11,190,000 $11,590,000
Net Income (Loss) $ (232,000) $ 1,251,000
Basic Net Income (Loss) per share $ (0.05) $ 0.27
Diluted Net Income (Loss) per share $ (0.05) $ 0.25
</TABLE>
9
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INLAND ENTERTAINMENT CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
6. 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 to such bank 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. The Klamath Tribes have made
all required interest payments during the fiscal year on the bonds held by the
Company.
Additionally, the Company issued an irrevocable letter of credit for $133,000 to
satisfy the terms of its corporate office lease agreement. Such letter of credit
will automatically renew on an annual basis until October 31, 2002 unless
canceled by the lessor.
7. NET INCOME/(LOSS) PER SHARE. Below is the reconciliation of the components of
the calculation of basic and diluted net income/(loss) per share for the time
periods indicated:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
1999 1998
---------- ----------
<S> <C> <C>
Net income available to common shareholders $ 698,768 $ 816,373
========== ==========
Weighted average shares outstanding -- Basic 4,747,194 3,887,015
Effect of stock options 434,207 75,078
---------- ----------
Weighted average shares outstanding -- Diluted 5,181,401 3,962,093
========== ==========
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED MARCH 31,
1999 1998
----------- -----------
<S> <C> <C>
Net income/(loss) available to common shareholders ($ 110,894) $ 1,494,538
=========== ===========
Weighted average shares outstanding -- Basic 4,556,804 3,872,971
Effect of stock options -- 326,875
----------- -----------
Weighted average shares outstanding -- Diluted 4,556,804 4,199,846
=========== ===========
</TABLE>
For the three months ended March 31, 1999, options to purchase 2,514,711 shares
of the Company's common stock, at prices ranging from $3.38 to $4.13 per share,
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.
For the nine months ended March 31, 1999, options to purchase 5,417,084 shares
of the Company's common stock, at prices ranging from $1.00 to $4.13 per share,
were not included in the computation of diluted EPS because they were
anti-dilutive for that purpose. The options, which expire on various future
dates through December 2008, were still outstanding at March 31, 1999.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
INDIAN GAMING
Inland Entertainment Corporation and its subsidiaries (the "Company" or
"Inland") are in the business of (i) providing services for gaming operations
under consulting agreements with Native American Tribes, (ii) web site
development and on-line marketing in gaming and non-gaming industries, and (iii)
consulting, marketing, and promoting of Internet casinos. The Company has
provided services to the Barona Group of Capitan Grande Band of Mission Indians
(the "Barona Tribe") since 1991. The Company is currently providing consulting
services to the Barona Tribe at the Barona Casino under the terms of
Modification #1 (the "Modification") to the Amended and Restated Consulting
Agreement (as amended by the Modification, the "Barona Consulting Agreement" or
the "Consulting Agreement") which expires in March 2004. The base consulting fee
paid to the Company under the Consulting Agreement is based upon a net profits
formula which includes the Barona Casino's income and expenses. Accordingly,
although gross revenues of the Barona Casino may increase, the Company's
consulting revenue may not correspondingly increase because expenses at the
Barona Casino also may have increased.
From February 1992 through March 1996, the Company provided casino management
services at the Barona Casino pursuant to a management agreement with the Barona
Tribe. During that same period, funds to purchase or construct all fixed assets
such as buildings, equipment and capital improvements, were contributed to the
Barona Casino by the Company. In the aggregate, the Company contributed
approximately $13,000,000 over the period. Neither the Barona Tribe nor the
Barona Casino paid for any of the fixed assets at the Barona Casino during such
period. Due to the "investment" made by the Company to the Barona Casino, the
value of the Barona Casino has increased, thereby enhancing the potential fees
which may be earned by the Company over the life of its contractual relationship
with the Barona Tribe. These monies contributed to the Barona Casino which have
been used to purchase or construct fixed assets have been viewed by the Company
as intangible assets and referred to as "deferred contract costs" and are being
amortized to expense over the remaining life of the Consulting Agreement through
March 2004. 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.
In 1996, the Barona Casino had become financially self-sufficient and the
Company's relationship with the Barona Tribe had evolved from that of manager of
the Barona Casino to consultant to the Barona Tribe which was now acting as the
manager of the Barona Casino. Since the Company has transitioned from manager to
consultant, there have been only two categories of investments by the Company in
the Barona Casino. The first category related to project commitments made to the
Barona Tribe by the Company when the Company was acting as "manager" pursuant to
the management agreement. Funds attributable to this category have equaled in
the aggregate approximately $10,000. The second category related to a $2,000,000
NIGC settlement. Commencing in November 1996, the Company committed to
contribute $2,000,000 to the Barona Tribe to be used to construct a new road and
entrance to the Barona Casino. As of March 31, 1999, the Company has paid
$1,200,000 of the $2,000,000 commitment.
At this time, the Company has no plans to contribute additional funds to the
Barona Casino or the Barona Tribe in the form of deferred contract costs.
However, the Company will assist the Barona Casino from time to time in
obtaining third party outside financing, if internal funding from the Barona
Casino is not adequate to meet the Barona Casino's project needs. See the
discussion herein under the caption "Liquidity and Capital Resources" relating
to the Company's advance of funds to the Barona Casino in connection with the
Casino's current expansion project.
In August 1998, a Tribal-State Compact was entered into between the State of
California and the Barona Tribe (the "Barona Compact"). The Barona Compact was
signed by the Governor of California and the
11
<PAGE> 12
Chairman of the Barona Tribe on August 12, 1998; thereafter, the Barona Tribal
Council voted to submit the Barona Compact to the U.S. Secretary of the Interior
(the "Secretary"). The Secretary's approval of the Barona Compact was published
in the Federal Register on October 22, 1998; however, the State of California
has requested that the Barona Compact not become effective at this time. It is
undeterminable when the State will implement the effective date of the Barona
Compact. Management believes this Compact ended a significant amount of
uncertainty and concern about the future of gaming activities at the Barona
Casino.
In October 1998, the Company made a $500,000 contribution to support "The Tribal
Government Gaming and Economic Self Sufficiency Act of 1998" (otherwise referred
to in California and herein as "Proposition 5" or the "Initiative") on the
November 1998 California General Election ballot. The Initiative was proposed by
several Indian Nations in California, together with support from certain
California State Legislators and approved by the California electorate.
Proposition 5 prescribed a model compact offered to all tribes by the State of
California, which the Governor was directed to execute or, if he did not, such
compact was deemed executed 30 days after submission to the Governor by any
Tribe. Since being approved by the voters in November 1998, there have been two
lawsuits filed in the California Supreme Court which challenge Proposition 5 on
both State and Federal grounds. At this time, it is uncertain what effect, if
any, these challenges will have on existing tribal-state compacts. Such legal
challenges have stayed the effectiveness of Proposition 5 until the California
Supreme Court rules on the State and Federal issues asserted. The State Supreme
Court announced on April 21, 1999 that it would hear challenges to Proposition 5
starting June 1, 1999.
WEB SITE DEVELOPMENT BUSINESS
In August 1998, the Company acquired 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 was acquired 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 was accounted for as a purchase and Cyberworks is
being operated as a wholly-owned subsidiary of the Company. There is only
approximately seven months of Cyberworks' operating results in the Company's
nine month consolidated financial statements ended March 31, 1999. Accordingly,
current and future financial statements may not be directly comparable to the
Company's historical financial statements. (See Notes to Interim Consolidated
Financial Statements, Note 5. Acquisition.)
INTERNET GAMING
In March 1998, the Company established a wholly-owned foreign subsidiary,
Worldwide Media Holdings N.V. ("WMH"), a Curacao, Netherland Antilles
corporation. WMH provides 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, WMH is providing consulting and marketing
services to international Internet casinos. WMH does not operate any of these
casinos and none of the casinos accept wagers from the United States or its
territories. WMH earns fees to promote and market such casinos based on a
percentage of the net profits of the on-line casinos.
The Company has incurred significant costs in the last year to research,
evaluate and pursue new business opportunities. This ultimately resulted in the
founding of WMH and the acquisition of Cyberworks. These business segments are
now past the start-up phase and the Company realized significant cost reductions
during the quarter ended March 31, 1999, compared with the preceding quarter,
primarily in the areas of compensation, professional services, advertising,
marketing and promotion. The Company expects this reduced expense structure to
continue during the next quarter ending June 30, 1999.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED WITH THE THREE MONTHS ENDED MARCH 31,
1999.
REVENUE. Revenues increased 11.2% from $3,782,500 for the three months ended
March 31, 1998 to $4,207,186 for the three months ended March 31, 1999. Revenues
from Indian gaming consulting decreased approximately $201,000, or 5.3%, despite
revenue growth at the Barona Casino, as a result of lower profit margins at the
Barona Casino due to an increase in operating expenses at that facility.
In the three months ended March 31, 1999, the Company had two other sources of
revenue not present during the same quarter in the prior year, (i) $507,587 was
earned by Cyberworks from web site development and on-line marketing; and (ii)
$117,599 was earned by WMH for marketing and consulting related to Internet
gaming. The Company's revenue for the three months ended March 31, 1998 was
exclusively from fees earned from Indian Gaming consulting.
OPERATING EXPENSES. General and administrative expenses increased 40.4% from
$2,006,464 for the three months ended March 31, 1998 to $2,816,841 for the three
months ended March 31, 1999, resulting primarily from (i) a write-off of
capitalized costs associated with internally developed software no longer
expected to be marketed or used to produce revenues; (ii) advertising,
marketing, and promotion of the on-line casinos; (iii) client relation expenses,
which included the purchase of an ambulance for the Barona Tribe; (iv)
amortization of goodwill related to the acquisition of Cyberworks; and (v)
consulting fees related to Indian Gaming, partially offset by a reduction in
consulting fees related to Internet Gaming.
Amortization of deferred contract costs decreased 58.8% from approximately
$407,000 for the three months ended March 31, 1998 to approximately $168,000 for
the three months ended March 31, 1999. In February 1998, a new consulting
agreement was entered into with the Barona Tribe that extended the term of the
contract by an additional 60 months, thereby increasing the deferred contract
costs amortization period by an additional 60 months.
OTHER INCOME AND EXPENSE. For the three months ended March 31, 1998, interest
income was approximately $146,000 compared to approximately $129,000 for the
three months ended March 31, 1999. The decrease was due to the decrease in the
Company's investments and cash equivalents.
Interest expense increased from approximately $137,000 for the three months
ended March 31, 1998 to approximately $188,000 for the three months ended March
31, 1999, as a result of an increase in notes payable to two shareholders,
including a former director of the Company, in connection with the repurchase of
shares of the Company's common stock held by them.
INCOME TAX PROVISION. The income tax provision decreased from $561,000 for the
three months ended March 31, 1998 to $465,000 for the three months ended March
31, 1999, based on decreased operating profits for the quarter.
NINE MONTHS ENDED MARCH 31, 1998 COMPARED WITH THE NINE MONTHS ENDED MARCH 31,
1999.
REVENUE. Revenue increased 2.6% from $10,765,469 for the nine months ended March
31, 1998 to $11,048,526 for the nine months ended March 31, 1999. Consulting
fees earned from the Barona Casino decreased approximately $963,000, or 8.9%,
despite revenue growth at the Barona Casino as a result of lower profit margins
at the Barona Casino due to an increase in operating expenses at that facility.
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In the nine months ended March 31, 1999, the Company had two other sources of
revenue, (i) $956,789 was earned by Cyberworks from web site development and
on-line marketing for approximately the seven month period since its acquisition
by the Company, and (ii) $289,638 was earned by WMH for marketing and consulting
related to Internet gaming. The Company's revenue for the nine months ended
March 31, 1998 was exclusively from fees earned from Indian Gaming consulting.
OPERATING EXPENSES. General and administrative expenses increased 65.5% from
$6,050,788 for the nine months ended March 31, 1998 to $10,016,409 for the nine
months ended March 31, 1999, partially resulting from a $500,000 contribution
the Company made to support "The Tribal Government Gaming and Economic Self
Sufficiency Act of 1998", discussed above, as well as approximately $300,000 in
additional political contributions relating to the November 1998 California
General Election.
Additional increases were also incurred in (i) start up costs, advertising,
promotion and customer support of the on-line casinos; (ii) compensation due to
increase in number of employees primarily from the acquisition of Cyberworks
which was partially offset by decreases in Inland's compensation expense; (iii)
consulting fees related to providing of services to the Barona Casino (iv)
professional services related to the development of WMH's businesses; (v)
general accounting and legal services; (vi) amortization of goodwill related to
the acquisition of Cyberworks; (vii) a write-off of capitalized costs associated
with internally developed software no longer expected to be marketed or used to
produce revenues;; (viii) facilities costs; and (ix) bad debt allowances
established for loans classified as non-current receivables. The increased
expenses were partially offset by decreases in (i) travel and entertainment;
(ii) other general consulting fees related to corporate matters; and (iii)
computer supply and software costs.
Amortization of deferred contract costs decreased 76.8% from approximately
$2,165,888 for the nine months ended March 31, 1998 to approximately $502,884
for the nine months ended March 31, 1999. In February 1998, a new consulting
agreement was entered into with the Barona Tribe that extended the term of the
contract by an additional 60 months, thereby increasing the deferred contract
costs amortization period by an additional 60 months.
OTHER INCOME AND EXPENSE. For the nine months ended March 31, 1998, interest
income was approximately $454,000 compared to approximately $478,000 for the
nine months ended March 31, 1999. The increase was due to the increase in the
Company's investments and cash equivalents during the first and second quarter
of fiscal 1999.
Interest expense increased from approximately $401,000 for the nine months ended
March 31, 1998 to approximately $521,000 for the nine months ended March 31,
1999, as a result of an increase in notes payable to two shareholders, including
a former director of the Company, in connection with the repurchase of shares of
the Company's common stock held by them.
INCOME TAX PROVISION. The income tax provision decreased 46.1% from $1,108,000
for the nine months ended March 31, 1998 to $597,000 for the nine months ended
March 31, 1999, based on decreased operating profit. The income tax provision
for the nine months ended March 31, 1999 exceeds the income before income taxes
during the same period because certain expenses, including approximately
$800,000 in political contributions and approximately $215,000 in amortization
of goodwill, are not deductible for tax purposes.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity at March 31, 1999 consisted of
unrestricted cash of $7,461,211 and future revenues generated from operations.
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 the nine months ended March 31, 1999, the Company's cash position
decreased $1,744,291 from the June 30, 1998 balance of $9,205,502, to $7,461,211
at March 31, 1999. The decrease was a result of cash flows used in operating
activities of approximately $1,816,000 and cash flows used in financing
activities of approximately $158,000 offset by cash flows generated from
investing activities of approximately $229,000 during the period.
Cash flows used in operating activities include: (i) $2,440,146 in short-term
advances to the Barona Casino for the Barona Casino expansion project discussed
above; (ii) increases in accounts receivable of approximately $345,000 primarily
due to Cyberworks' billings for services performed; (iii) decreases in accounts
payable and accrued expenses of approximately $180,000; and (iv) an increase in
prepaid assets of approximately $76,000 primarily due to a $50,000
non-refundable consulting fee retainer paid during the quarter.
Cash flows provided by operating activities include: (i) amortization of net
deferred contract costs of approximately $503,000 which decreased net deferred
contract costs from $3,855,427 at June 30, 1998 to $3,352,543 at March 31, 1999;
(ii) depreciation on property and equipment of approximately $227,000; (iii)
goodwill amortization of approximately $215,000 related to the acquisition of
Cyberworks; (iv) establishment of bad debt reserves of approximately $173,000
primarily for third party loans on the Company's books; (iv) an increase in
deferred revenues of approximately $159,000 which represents payments received
for future services such as maintenance contracts or down payments for design
and development work to be performed by Cyberworks; and (v) deferred
compensation expense of approximately $82,000 related to stock options issued to
non-employees for which the fair market value of services received is charged to
expense over the service period.
Cash flows provided by investing activities of $1,225,553 resulted from
short-term investments of $1,876,667 maturing during the nine months ended March
31, 1999, partially offset by an additional short-term investment of $651,114
purchased during the three months ended March 31, 1999. These investments were
comprised of Euro-dollar time deposits, commercial paper, and banker's
acceptances with original maturities greater than three months. The Company has
other similar investments as of March 31, 1999; however, most are investments
with maturity lengths less than three months and are, therefore, classified as
cash and cash equivalents in the financial statements.
Cash flows used by investing activities include: (i) net investments in fixed
assets of approximately $267,000, consisting primarily of computer equipment,
software, leasehold improvements, and a telephone system to support the WMH
business; and (ii) a $500,000 cash payment and $242,530 in acquisition related
expense payments for the purchase of Cyberworks. (See Notes to Interim
Consolidated Financial Statements, Note 5. Acquisition.)
With respect to the current project to expand the Barona Casino discussed above,
the Company and the Barona Tribe will share in funding the expansion costs
incurred prior to obtaining outside financing. The Company expects to commit
approximately $7,000,000 as an unsecured, non-interest-bearing advance to the
Barona Casino. As of March 31, 1999, the Company had advanced $2,440,146 and, as
of May 5, 1999, the Company had advanced approximately $2,800,000. These
advances have been, and such future advances will be, accounted for as a
receivable from the Barona Casino to the Company. Payment of the receivable is
expected to occur when the Barona Tribe obtains outside financing which is
expected to be sometime in early fiscal 2000. Of the $2,440,146
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receivable balance, approximately $1,100,000 relates to funding of the original
design concepts that have been changed significantly. The Company may consider
absorbing (without reimbursement) a portion of these original design costs;
however, no decision has been made at this time. If the Company ultimately
decides to absorb some or all of these advances, they will be charged to expense
at that time. Accordingly, no allowance has been established for such portion of
the receivable at March 31, 1999.
In 1992, there was a one-time advance of future fees under the Consulting
Agreement with the Barona Tribe of approximately $2,500,000. At the beginning of
the management relationship in 1992 between the Barona Tribe and the Company,
the Barona Tribe was not in a financial position to make required investments in
the Barona Casino. The Company invested approximately $2,500,000 into the Casino
which was accounted for as revenue to the Barona Casino and expensed by the
Company due to the uncertainty of recovery. The amount was not accounted for as
a deferred contract cost (similar to those investments discussed in the Overview
above).
As the Barona Casino became profitable between 1992 and 1994, $2,500,000 of the
initial profits of the Barona Casino were distributed to the Company and were
recorded on its books as an obligation called "Advances of Future Consulting
Fees." The Barona Casino established a corresponding receivable. When the
consulting relationship ends, the Company and the Barona Tribe will discuss how
to handle this balance. Depending on the outcome, if the obligation is forgiven
by the Barona Tribe, the Company may have an additional source of liquidity in
the sense that a debt may not need to be repaid; however, if the balance reverts
back to the Barona Casino or the Barona Tribe, the Company may have a debt to
repay. There is no indication how this issue will ultimately be resolved. All
other transactions between the two parties are being treated independently. The
remaining difference of the March 31, 1999 balance in Advances of Future
Consulting fees of $2,555,181 and the $2,500,000 is due primarily to timing
differences between consulting revenues earned and recognized but not yet paid
and the actual payment of the consulting revenues. Consulting fees have
typically been paid in the month subsequent to the month in which services were
performed. However, as a result of the short-term funding requirements for the
expansion project, the March and April 1999 consulting fees may not be paid for
60 to 90 days, or until the Barona Tribe obtains outside financing which should
be sometime in early fiscal 2000.
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 closed 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 that commenced with the
fiscal year ended 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
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Tribe has entered into the Compact, equals or exceeds one and one-half times the
consulting fees for the fiscal year ended June 30, 1996. The Company intends to
record as the additional cost of the repurchase of its common stock, each
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. The Initial Contingent Obligation has been
met for the first two test periods.
The Company's long-term debt related to this stock repurchase is $7,500,000 as
of March 31, 1999. In addition, if all contingent obligations are met, a maximum
of $8,856,488 of aggregate additional consideration may still have to be repaid
under the Stock Purchase Agreement. Management believes that future revenues
generated from operations and unrestricted cash will be sufficient to service
and repay the aggregate amount of this long-term debt.
Restricted cash and other investments of approximately $2,115,000 include; (i)
an irrevocable letter of credit for $133,000 to satisfy the terms of the
corporate lease agreement that will automatically renew on an annual basis until
October 31, 2002, unless canceled by the lessor; and (ii) funds in the amount of
$1,982,320 which have been invested or pledged as security for amounts borrowed
by third parties in connection with the construction of the Kla-Mo-Ya Casino, a
gaming facility near Chiloquin, in south central Oregon. 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 issued revenue bonds to fund the construction of the
Kla-Mo-Ya Casino. 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. The Klamath Tribes
have made all required interest payments during the fiscal year on the bonds
held by the company. (See Notes to Interim Consolidated Financial Statements,
Note 6. Restricted cash and other investments.)
WMH has entered into a long-term contract that obligates it to spend $120,000 a
year for marketing services related to the promotion of on-line casinos.
FORWARD-LOOKING STATEMENTS AND CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Included in this Item 2, and in the Notes to the Interim Consolidated Financial
Statements 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
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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 net operating profits due to (a)
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, (b) increases in expenses related to the operation of the Barona
Casino or (c) other factors; or (iii) a modification to the Consulting
Agreement between the Company and the Barona Tribe as a result of
regulatory compliance requirements, 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.
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 2. --
Barona Consulting Agreement.)
o UNCERTAINTIES CONCERNING INTERNET GAMING
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
business venture to market world-wide Internet gaming. 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
won't 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.
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 YEAR 2000 READINESS DISCLOSURE
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 industries
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.
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The Company has addressed the critical systems and related software used
in the Cyberworks business as well as Inland's internal financial and
administrative systems and has determined that they are Year 2000
compliant or are not adversely impacted by the Year 2000 issue. No
significant costs were incurred to perform the evaluation and testing of
these systems, and all costs have been expensed as incurred. The Company
will continue to evaluate all system upgrades, new hardware and software
purchases through the Year 2000.
The Company is addressing the impact to their most significant customer,
the Barona Casino, and the impact to WMH's on-line gaming computer
software vendor.
The Barona Casino has formed a committee to address the Year 2000 issue.
It has a strategy that includes an analysis phase, project plan, testing
phase, implementation phase and a risk contingency plan. The Company is in
the process of reviewing their strategic plan and has made formal
inquiries as to their progress during the third quarter of fiscal 1999.
According to representations made by Barona Casino management they have,
(i) sent letters to critical vendors requesting Year 2000 compliance and
contingency plan information; (ii) identified problem systems; (iii)
implemented software "patches" on the food and beverage tracking system;
(iv), substantially completed the replacement of all personal computers to
Year 2000 compliant hardware; (v) replaced servers; and (vi) have
purchased Year 2000 diagnostic software that will be used for additional
testing during the next few months. Within the next several months, the
Barona Casino expects responses from their critical vendors regarding such
vendors' Year 2000 compliance and contingency plans.
The on-line gaming casinos marketed and promoted by WMH are dependent on a
third-party foreign computer software supplier (the "supplier"). The
supplier provides both the gaming casino software as well as the
electronic commerce system that handles all wagers. The Company has
requested Year 2000 compliance and contingency plan information from this
supplier. According to representations made by the management of the
supplier they have undertaken an evaluation of the potential impact of the
transition to the Year 2000 on their products and they are not aware of
any material issues relating to Year 2000 compliance in respect to their
products. However, the Year 2000 compliance of the supplier's products may
be affected to the extent that the supplier's electronic commerce and
gaming software incorporates or operates in conjunction with the software
of other developers which may not be Year 2000 complaint. If the systems
of the financial institutions, credit card processors, or others involved
in electronic commerce transactions are not Year 2000 complaint, there can
be no assurance that the supplier's software, in connection with these
products, will operate consistently in the Year 2000. The supplier is in
the process of assessing the extent to which they are vulnerable to the
failure of their significant customers and suppliers to remediate their
own Year 2000 issues. In the event of inconsistent operation of the
supplier's casino software and electronic commerce system in the Year
2000, there could be a material adverse impact on the operations of WMH's
on-line gaming operations.
The Company is in the process of requesting and obtaining Year 2000
compliance and contingency plan information from other major suppliers and
customers of the Company and its subsidiaries to assess the potential
risks of non-compliance and the resulting impact on the Company. At this
time, the Company has not identified any major supplier or customer that
is non-compliant or that poses a risk to the Company. The Company plans on
having this process complete for existing suppliers and customers by May
31, 1999, but will continue this process throughout 1999 for new suppliers
and customers. The Company, however, will not be able to independently
verify that such external suppliers and customers are, in fact, Year 2000
compliant.
The Company's plan to evaluate the status of suppliers' and customers'
efforts is a means of managing risk but cannot eliminate the potential for
disruption due to third party failure. 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 (with the exception of the Barona
Casino) to minimize the
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impact, if any, that such a relationship(s), will have on the Company and
its subsidiaries' operations. If it is determined that the Barona Casino
has as issue with Year 2000 compliance, the Company would actively support
their efforts to gain compliance in a timely manner to mitigate system
failures causing disruptions in their operations. The cost or the
likelihood of this event occurring is not known at this time.
Costs for Year 2000 compliance evaluation will continue to be expensed as
incurred and are not expected to have a material impact on the Company's
consolidated results of operations.
The information set forth above under this caption "Year 2000 Readiness
Disclosure" relates to the Company's efforts to address the Year 2000
concerns regarding the Company's (a) operations; (b) services, products
and technologies sold to third parties; and (c) major suppliers and
customers. Such statements are intended as Year 2000 Statements and Year
2000 Readiness Disclosures and are subject to the Year 2000 Information
Readiness Act.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. The Exhibit listed below is hereby filed with the U.S.
Securities and Exchange Commission (the "Commission") as part of this Quarterly
Report on Form 10-QSB.
EXHIBIT
NO. DESCRIPTION
------- -----------
27 Financial Data Schedule.
(b) Reports on Form 8-K. No reports on Form 8-K were filed with the
Commission during the Company's third quarter ended March 31, 1999.
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SIGNATURES
In accordance with the requirements 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
Date: May 14, 1999 By: /S/ ANDREW B. LAUB
-------------------------------------
Andrew B. Laub
Executive Vice President,
Chief Financial Officer and
Treasurer
(Principal Financial Officer)
Date: May 14, 1999 By: /S/ KEVIN MCINTOSH
-------------------------------------
Kevin McIntosh
Controller
(Principal Accounting Officer)
22
<PAGE> 23
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
------- -----------
27 Financial Data Schedule.
23
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 7,461,211
<SECURITIES> 651,114
<RECEIVABLES> 527,875
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 11,308,112
<PP&E> 1,594,523
<DEPRECIATION> 449,334
<TOTAL-ASSETS> 22,282,441
<CURRENT-LIABILITIES> 4,525,872
<BONDS> 7,900,000
0
0
<COMMON> 4,752
<OTHER-SE> 9,851,817
<TOTAL-LIABILITY-AND-EQUITY> 22,282,441
<SALES> 0
<TOTAL-REVENUES> 4,207,186
<CGS> 0
<TOTAL-COSTS> 2,984,469
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 173,181
<INTEREST-EXPENSE> 187,500
<INCOME-PRETAX> 1,163,768
<INCOME-TAX> 465,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 698,768
<EPS-PRIMARY> .15
<EPS-DILUTED> .13
</TABLE>
