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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, 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
(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: (858) 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: $15,200,635
As of September 17, 1999, 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 $6,238,433.
State the number of shares outstanding of each of the issuer's classes
of common equity as of the latest practicable date: At September 17, 1999, there
were 4,753,786 shares outstanding of the issuer's common stock, $.001 par value
per share (the only class of common equity).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement prepared in connection with the Annual
Meeting of Shareholders to be held in 1999 -- Part III.
Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]
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INLAND ENTERTAINMENT CORPORATION
ANNUAL REPORT ON FORM 10-KSB
FOR THE FISCAL YEAR ENDED JUNE 30, 1999
TABLE OF CONTENTS
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PART I
ITEM 1: DESCRIPTION OF BUSINESS...................................... 1
ITEM 2: DESCRIPTION OF PROPERTY...................................... 26
ITEM 3: LEGAL PROCEEDINGS............................................ 27
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 27
PART II
ITEM 5: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..... 27
ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.... 28
ITEM 7: FINANCIAL STATEMENTS......................................... 41
ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE..................................... 66
PART III
ITEM 9: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT............ 66
ITEM 10: EXECUTIVE COMPENSATION....................................... 66
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................... 66
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............... 67
ITEM 13: EXHIBITS AND REPORTS ON FORM 8-K............................. 68
SIGNATURES............................................................. 73
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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
successor to a Delaware corporation organized in June 1994, also known as Inland
Casino Corporation ("ICC II"), which was formed to consolidate various gaming
related entities then 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.
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 distribution services for Internet related businesses. WMH currently
provides these services to four Internet Casinos (Kenny Rogers Casino, Casino
Australia, The Good Luck Club, and Las Vegas At Home Casino). WMH is responsible
for all marketing costs and is paid a fee for its services. Additionally, during
the fourth quarter of the fiscal year ended June 30, 1999 ("Fiscal 1999"), the
Company developed a gaming portal web-site ("Vegas At Home.com") to expand its
Internet and gaming related operations.
In August 1998, the Company purchased Cyberworks, Inc. ("Cyberworks"), a
web-site development and on-line marketing company with existing clients in a
wide range of industries. Cyberworks operates as a wholly-owned subsidiary of
the Company incorporated in the State of California.
In July 1999, the Company formed an Internet business and investor
relations consulting division, which is operating under the name
"Venture-Catalyst.com." Through the Venture-Catalyst.com Division, the Company
offers to public and private companies a wide array of Internet business
services, including financial public relations, venture capital sourcing and
on-line business strategy. One of the Division's objectives is to act as a
financial consultant to advise clients regarding sources of financing. The
Division may, under certain circumstances, make equity investments in, or take
all or a portion of its consulting fees in, equity of its clients.
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During Fiscal 1999, the Company operated in three business segments: (a)
Indian gaming; (b) web-site development services; and (c) Internet gaming.
BUSINESS STRATEGY
In the fiscal year ending June 30, 2000 ("Fiscal 2000"), the Company
intends to (a) continue its long-standing relationship with the Barona Tribe by
providing consulting services to it in connection with the Barona Tribe's
operation and expansion of the Barona Casino, (b) develop and market its
Venture-Catalyst.com Division, (c) continue to develop and expand the business
of Cyberworks, and (d) continue to develop the WMH marketing and consulting
business related to Internet gaming.
The Company intends to continue its pursuit of other Internet related
business opportunities and plans to transition itself, over time, from a gaming
consulting company to an Internet consulting and "venture catalyst" company.
Part of this strategy will be to continue to acquire and expand upon the
Company's expertise in all facets of the Internet through the hiring of
additional specialized personnel, and possibly, through additional acquisitions
or investments in small web-development, e-commerce application and/or on-line
marketing companies.
INDIAN GAMING SEGMENT
OVERVIEW
Since 1991, the Company has provided consulting services to several
Native American Tribes, including its principal client, the Barona Tribe. During
the past two fiscal years, the Company's revenues in the Indian gaming segment
have been 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 is operated by the Barona Tribe and consists of the
"Barona Big Top," a turn-of-the-century circus theme casino which includes 1,057
video games, 19 table games, a 1,500-seat bingo parlor, a 240-seat buffet
restaurant and a 174-seat off-track betting facility. The complex exceeds
100,000 square feet and is located on approximately 15 acres, including parking
for approximately 2,500 cars. The Barona Casino is open 24 hours a day, 365 days
a year. The Barona Tribe has recently commenced a $120 million development
project which includes a new casino with approximately 175,000 square feet of
gaming space, a 100 room resort hotel and an 18-hole championship golf course.
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
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Amended and Restated Consulting Agreement (the "Amended and Restated Consulting
Agreement"). The Amended and Restated Consulting Agreement, by its terms,
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 (a)
consults with and advises the Barona Tribe, members of the Barona Tribal Council
and the Barona Tribal Gaming Commission, (b) provides technical assistance and
training to the employees and staff of the Barona Casino, and (c) provides 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
giving nine months' notice to the Company, during which time the Consulting
Agreement will remain in effect. Either party may terminate the Consulting
Agreement for 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. In
addition, the Barona Tribe may terminate the Consulting Agreement if the Company
commits 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
Barona Tribe, 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.
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The Barona Casino relies extensively on electronic video games,
including video pull-tab games, video poker, video keno and video bingo (the
"electronic gaming machines"). The Company does not own any of the electronic
gaming machines. The Company has entered into three leases (each, a "Gaming
Machine Lease" and collectively, the "Gaming Machine Leases") for the electronic
gaming machines on behalf of the Barona Casino. To the extent that the Gaming
Machine Leases are "collateral agreements" to the Consulting Agreement within
the meaning of the Indian Gaming Regulatory Act ("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
Gaming Machine Leases to the National Indian Gaming Commission ("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 that relate to gaming machines meeting
applicable legal requirements.
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 7 of
those tribes have 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 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 (a)
periodic over-building,
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which can adversely affect patronage levels; (b) changes in regional and local
market conditions; (c) changes in regional and local population and disposable
income characteristics; and (d) 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 and
its subsidiaries.
FEDERAL REGULATION. Gaming on Native American Indian reservations is
governed by 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 (a) promoting tribal economic development, self sufficiency, and strong
tribal governments; (b) providing a statutory basis for the regulation of gaming
by Indian tribes adequate to shield each tribe from organized crime and other
corrupting influences; (c) ensuring that the Indian tribes are the primary
beneficiaries of the gaming operations; and (d) assuring that gaming is
conducted fairly and honestly by both the operator and the 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. Class II
gaming includes (a) bingo (whether or not electronic,
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computer or other technological aids are used), if played in the same
location, pull-tabs, lotto, punch boards, tip jars, instant bingo and other
games similar to bingo, and (b) 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 (a) any banked card
games, including baccarat, chemin de fer or blackjack, or (b) electronic or
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
(a) such Indian gaming is located within a state that permits such gaming for
any purpose by any person, and (b) 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
(a) fund tribal government operations or programs; (b) provide for the general
welfare of the Indian tribe and its members; (c) promote tribal economic
development; (d) donate to charitable organizations; or (e) help fund operations
of local government agencies.
Any Indian tribe which operates a Class II gaming activity and which has
(a) continuously conducted such activity for a period of not less than three
years, including at least one year after 1988; and (b) 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 things, (a) conducted 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 (b) adopted and is implementing adequate systems for
accounting for all revenues from the activity, monitoring of all employees and
prosecuting violations 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.
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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 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 applicable tribal gaming ordinance, and the
provisions of any applicable tribal-state compact, provide the regulatory
framework for gaming on the Barona Reservation.
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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 the Chairman's designee), after notice and
hearing, has the authority to require contract modifications or may void any
contract in the event of a finding of certain 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 (a) adequate accounting procedures and verifiable
financial reports, which must be furnished to the tribe; (b) tribal access to
the daily operations of the gaming enterprise, including the right to verify
daily gross revenues and income; (c) minimum guaranteed payments to the tribe,
which must have priority over the retirement of development and construction
costs; (d) a ceiling on the repayment of such development and construction
costs; and (e) 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 (a) an elected
member of the Indian tribal government that owns the facility being managed; (b)
has
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been or is convicted of a felony gaming offense; (c) has knowingly and willfully
provided materially important false information to the NIGC or the tribe; (d)
has refused to respond to questions from the NIGC; or (e) 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 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 such party 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 such 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 and its subsidiaries.
In March 1996, the Barona Tribe submitted the Initial Consulting
Agreement (a predecessor agreement to the Amended and Restated Consulting
Agreement) to the NIGC. In May 1996, the NIGC (a) determined that the Initial
Consulting Agreement was not a management agreement and, therefore, not subject
to NIGC approval and (b) 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 benefited 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
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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 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 Amended and Restated Consulting
Agreement. In September 1999, the Company submitted the Modification to the NIGC
for review. The review commenced in March 1999 is currently pending.
The Company believes that the Amended and Restated Consulting Agreement,
as amended by the Modification, is not a management contract, based upon (a) the
May 1996 and July 1997 determinations of the NIGC and the BIA, respectively,
with respect to the Initial Consulting Agreement, (b) the NIGC's findings in the
January Settlement Agreement, and (c) 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. The failure of the NIGC to determine that the
Amended and Restated Consulting Agreement, as amended by the Modification, is
not a management contract could have a material adverse effect on the business
and financial condition of the Company and its subsidiaries. If the NIGC
concludes that the Amended and Restated Consulting Agreement, as amended, is not
a management agreement, the NIGC will forward the Amended and Restated
Consulting Agreement and the Modification 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 Amended and Restated Consulting Agreement and the Modification,
and such failure to approve such agreements 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.
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
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<PAGE> 13
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.
STATE REGULATION. Pursuant to IGRA, certain electronic gaming activities
are permissible only if agreed upon by state governments and tribal
representatives. 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
their allocated machines 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 as set forth in 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
Barona Compact, as well as other compacts with other Indian tribes negotiated
at that time, is based upon the provisions of the Pala 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 had to be approved by
the U.S. Secretary of the Interior. The Barona Compact was approved by the
Secretary, effective October 22, 1998.
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<PAGE> 14
A summary of the important provisions of the Barona Compact is
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 to have 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: (a)
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 (b) 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, with the
exception noted below, only the "Indian Lottery Games" which are defined by the
terms of the Barona Compact may be operated in the Barona Casino. 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: the Indian Video Lottery Match Game and the 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: (a) the Barona Tribe
may not operate any Class III gaming in a hotel or a structure which includes a
hotel; (b) card games, including Class II card games, may not be played in the
same room as that in which Class III activities are conducted; (c) no
complimentary alcoholic beverages may be served at a compacted gaming facility;
(d) gaming may not be the exclusive business activity at any compacted facility;
(e) 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); (f) 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 (g) 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 $5,000 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 1,057
devices. Additionally, if state legislation is enacted which establishes
economic development zones,
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<PAGE> 15
the allocated lottery devices permitted may be reduced by the number of devices
representing 50% of the net income derived from private
investments.
Pursuant to an informal agreement with the California Division of Gaming
Control (the "Gaming Control Division"), the Barona Tribe has been permitted to
continue to operate its current 1,057 electronic gaming devices at the Barona
Casino for an indefinite period of time. With the consent of the Gaming Control
Division, of the 1,057 electronic gaming devices being operated at the Barona
Casino, 8 are prototypes of the Indian Gaming Machines prescribed by the Barona
Compact. At the present time, there are no such Indian Lottery devices available
to any compacted Indian tribe in California other than for testing purposes.
Based on the limited testing, there is insufficient data to determine
whether these 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 the Barona Casino's operations may have a materially
adverse impact on the fees paid to the Company under the Consulting Agreement.
However, in light of the new compact which the Barona Tribe has recently
executed with the State of California and the new ballot measure to be
included in the March 2000 ballot which, if adopted by the California voters,
will significantly expand the scope of Indian gaming in California (both
discussed below), the uncertainties relating to the Indian Lottery Games may
become moot.
Pursuant to the 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 three years ago
and adopted 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 members of the Barona Tribe, must apply for a license and a 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
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<PAGE> 16
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 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, the manufacturer and the 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 $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
$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 of 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), and certain related
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 (a) significant environmental
effects outside the Barona Reservation; (b) law enforcement services or other
necessary public services; (c) compliance with local and county building and
safety standards; (d) local public health and safety compliance costs, including
planning and activities requiring substantial local involvement and financial
mitigation; and (e) mitigation of compliance with the California Environmental
Quality Act.
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<PAGE> 17
The Governor may, at any time, prematurely terminate the Barona Compact
under any of the following circumstances: (a) if at any time there is a
legislative enactment or constitutional amendment which authorizes slot machines
for any purpose in California; (b) the Barona Tribe is found to have engaged in
any prohibited Class III gaming on two separate occasions or to have violated
the Barona Compact provisions on five separate occasions; or (c) 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 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.
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
certain Indian tribes, including the Barona Tribe. AB489 was scheduled to go
into effect on January 1, 1999; however, a referendum petition to overturn AB489
qualified for the March 2000 general election ballot. 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 Barona Compact is sufficient.
On September 10, 1999, the Governor of the State of California entered
into tribal-state compacts with 57 Federally recognized Indian tribes, including
the Barona Tribe. Such compacts are subject to ratification by the California
legislature, approval by the U.S. Secretary of the Interior and passage of
California State Constitutional Amendment 11. (See the discussion regarding such
Amendment below under the caption "Legislation"). On September 10, 1999, the
California Legislature voted to ratify each of the above-referenced compacts
including the Barona Compact II. There is no assurance that the remaining
conditions will be satisfied. For purposes of the discussion herein, the
September 10, 1999 Barona Compact shall be referred to as the "Barona Compact
II." Until the above-referenced conditions are satisfied, the Barona Compact
shall remain in effect.
The Barona Compact II significantly expands the permissible scope of
Indian gaming beyond that permitted under the Barona Compact. Pursuant to the
Barona Compact II, the scope of permissible gaming activities includes the
operation of "gaming devices," including slot machines and various other
electronic video games, all of which may be "house" banked; any banking or
percentage card game; and games authorized under the California State Lottery.
In addition, the Barona Compact II does not restrict the Barona Tribe from
operating Class III gaming in a hotel and does not restrict any card games from
being played in the same room as Class III gaming devices. The Barona Compact II
also contains the following key provisions: (a) no complimentary alcoholic
beverages may be served at a compacted gaming facility; (b) gaming does not have
to be the exclusive activity at any compacted facility; (c) 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); (d) if alcohol is being served in the
gaming facility, no person under the age of 21 is permitted to play or be
present in any room in which Class III gaming activities are being conducted and
in which alcoholic beverages may be consumed; (e) if no alcohol is served in the
gaming facility, no person under the age of 18 is permitted to play or be
present in any room in which Class III gaming activities are being conducted;
and (f) the Barona Tribe has been permitted to keep its 1,057 gaming devices.
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<PAGE> 18
The Barona Tribe may acquire licenses to use gaming devices in excess of
1,057, but in no event may the Barona Tribe operate more than 2,000 gaming
devices. The Barona Tribe may acquire and maintain a license to operate a gaming
device by paying to the State of California on a quarterly basis the following
amounts:
<TABLE>
<CAPTION>
Number of Fee Per Device
Licensed Devices Per Annum
<S> <C>
1 - 350 $0
351 - 750 $900
751 - 1,250 $1,950
1,251 - 2,000 $4,350
</TABLE>
Pursuant to the terms of the Barona Compact II, licenses to use gaming
devices shall be awarded pursuant to a formula set forth in such compact.
In addition to the licensing fees, the Barona Tribe will be required to
make contributions to a state fund at the conclusion of the first calendar
quarter following the second anniversary date of the effective date of the
Barona Compact II. The Barona Tribe will make the contribution according to a
formula based on the number of gaming devices in operation at September 1, 1999
and will be in a range from 0 to 13% of the gaming device's net winnings.
Pursuant to the Barona Compact II, the State of California and the
Barona Tribe must establish a method for the licensing of all key employees of a
gaming entity. The licensing process shall involve joint cooperation between the
Tribal Gaming Commission and the State Gaming Agency. The Barona Tribe must
establish an independent Tribal Gaming
16
<PAGE> 19
Commission, which will then have primary responsibility for investigation and
regulation of gaming on the reservation. As noted above, the Barona Tribe
established their own Tribal Gaming Commission three years ago and adopted a
Tribal Gaming Ordinance to authorize gaming on the Barona Reservation in 1993,
which was subsequently approved by the NIGC in 1994.
Findings of suitability are granted for two years and key employees,
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 a finding of suitability. 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 II 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 II. 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 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 Agency. The Barona Tribe must
maintain a list of all of its gaming devices, the shipping information, the
manufacturer and the 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 II requires the Barona Tribe to carry public
liability insurance with initial limits of $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 $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 of
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 II 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), and certain related
California laws pertaining to safety and health issues for employees. The gaming
facility must comply with California unemployment, disability, withholding tax,
compensation and working hour provisions, and must allow the Barona Tribe's
service employees to bargain for collective representation of some type. The
Barona Tribe agrees not to interfere with organizational efforts of a union or
other similar entity. The Barona Compact II also sets forth a form of Tribal
Labor Relations Ordinance which every signing tribe must adopt. The Barona Tribe
is currently inquiring of the State of California whether their existing similar
ordinance is sufficient.
The Barona Tribe or the State of California may bring an action in
Federal court, after providing a 60 day written notice of an opportunity to cure
any alleged breach of the Barona
17
<PAGE> 20
Compact II for a declaration that the party has materially breached such
Compact. Upon issuance of such a declaration, the complaining party may
unilaterally terminate the Barona Compact II upon service of written notice on
the other party. In the event a Federal court determines that it lacks
jurisdiction over such an action, the action may be brought in the superior
court for the county in which the Barona Casino is located. The terms and
conditions of the Barona Compact II may be amended at any time by mutual and
written agreement of both parties.
"The Tribal Government Gaming and Economic Self Sufficiency Act of 1998"
(otherwise referred to 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 would
be authorized to execute a gaming compact containing the terms prescribed
therein. Pursuant to the terms of the Initiative, execution of a compact became
a ministerial act which must be accomplished within 30 days after written
request from a tribe. 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 from the one set out in the Initiative. The Governor was
authorized to negotiate and execute such a compact without legislative approval
as long as it did 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 California legislature. If the California legislature acted
to pass a law which expands the scope of permissible gaming authority, such
legislation would not be deemed in conflict with Proposition 5. In August 1999,
the California Supreme Court ruled that those provisions of Proposition 5 which
attempted to amend the California constitutional prohibition against gaming were
unconstitutional. While this ruling did not effect the validity of the Barona
Compact, it did preclude the Barona Tribe, as well as other Indian tribes, from
entering into the "form" compact provided by Proposition 5, thereby allowing
such tribes to offer electronic games which more closely resembled "Las Vegas"
style games and to expand the scope of gaming overall.
On September 10, 1999, the California legislature approved State
Constitutional Amendment 11 ("SCA 11"), a proposed amendment to the California
Constitution which would significantly expand the scope of Indian gaming in the
State of California. SCA 11 addresses the deficiencies of Proposition 5. If
approved by the people of California on the March 2000 General Election Ballot,
SCA 11 would authorize the Governor to negotiate and conclude tribal-state
gaming compacts for the operation of slot machines and for the conduct
18
<PAGE> 21
of lottery games and banking and percentage card games by Federally recognized
Indian tribes on Indian lands in California. SCA 11 further provides that any
such compact would be subject to ratification by the California legislature.
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 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.
CONCLUSION CONCERNING INDIAN GAMING REGULATION
There are significant civil and criminal penalties associated with
operating gaming activities 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 and its subsidiaries. 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.
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<PAGE> 22
WEB-SITE DEVELOPMENT SEGMENT
OVERVIEW
In August 1998, the Company acquired Cyberworks, Inc., an Internet
marketing and web-site development company. Cyberworks operates as a
wholly-owned subsidiary of the Company. Cyberworks' services include full
service web-site development, strategic consulting for interactive and on-line
business development and custom Internet application. Cyberworks provides its
services to clients in the entertainment, technology and business-to-business
industries, and to various professional associations and non-profit
organizations.
COMPETITION
Cyberworks competes with a number of Internet professional services
firms nationally to address the significant and rapidly growing market for
Internet solutions. The financial, technological and personnel resources of
these firms vary significantly and certain competitors may have a greater
ability and resources to supply clients with certain strategic, technical and
creative skills. Competition in the future for Cyberworks also may include (a)
traditional marketing, advertising or technology service providers, (b) national
information technology consulting service providers or (c) large computer
technology product and service vendors.
MARKETING STRATEGIES
Cyberworks markets its services as a consultant and web-site developer
to its customers through personal contacts, media advertising, participation at
industry conferences and presentations of the Company's qualifications and
credentials. In its role as a consultant, Cyberworks develops marketing and
distribution strategies for its clients, including innovative on-line
promotional programs and focused interactive efforts.
The Company believes that the most successful Internet companies will
rapidly identify market demands and move quickly to satisfy those demands.
Cyberworks' marketing objective is to gain market share, secure critical
strategic partnerships, and to create a brand name, making competition more
difficult for new entrants. As part of Cyberworks' marketing strategy, it
strives to keep abreast of Internet and industry-specific developments and to
identify and target companies as clients who have the potential to become
industry leaders.
20
<PAGE> 23
INTERNET GAMING SEGMENT
Since March 1998, Inland Entertainment through consulting agreements
with its wholly-owned subsidiary, Worldwide Media Holdings, N.V. ("WMH"), 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 services to the
following international Internet casinos: Casino Australia, the Kenny Rogers
Casino, The Good Luck Club and Las Vegas At Home Casino. WMH does not
operate any of these casinos and none of the casinos accept wagers from the
United States and its territories.
Additional services provided by the Company include (a) designing,
developing and improving casino games; (b) developing web sites, splash pages
and banner ads used in advertising and marketing on the Internet; and (c)
developing customer service programs designed to promote repeat business and a
high level of customer satisfaction and loyalty for its clients.
The acquisition of Cyberworks in August 1998 constituted a significant
addition to the consulting and marketing services that the Company provides to
its Internet related clients. As a leader in both Internet marketing and
web-site design, Cyberworks provides Inland Entertainment 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.
On July 12, 1999, the Company launched the "Vegas At Home" portal
web-site, which is designed to provide both the gaming industry and its gaming
patrons with an on-line, central location or "town" containing a variety of
gaming related products, merchandise, information and links to most significant
traditional casinos, as well as links to the four above-referenced
Internet-based casino web-sites.
WMH has entered into two significant 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 the casinos that are serviced by WMH.
Under the terms of the Marketing Representative Agreement, WMH is responsible
for providing Cyberluck and Bardenac services related to (a) web site design,
engineering and construction including the development of entry and download
instructions and playing strategy pages; (b) advertising production, design and
placement both on-line and off-line, all directory and search engine
submissions, and all banner advertising design, construction and placement; (c)
promotional
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items, discounts, "free play" promotions, activities, contests for prizes and/or
money related to the casinos; (d) 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
(e) 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 which commenced on March 13, 1998, with a one-year automatic renewal
subject to (a) certain termination rights of the parties and (b) 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 (a) employ its best efforts to market and
promote the software of IOL to prospective end-users; (b) create, implement and
pay for all marketing and promotional efforts related to marketing and promotion
of the software to prospective end-users; and (c) 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 years which commenced on
March 13, 1998, with a one-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).
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COMPETITION
The Company competes with other management and consulting companies that
market, promote and distribute Internet casinos and related products. The growth
in the number of Internet casinos continues to be 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 other companies
that operate 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 (a) the proliferation in the number of on-line casinos and
gaming-related portal sites; (b) changes in international, national, regional
and local market conditions; (c) growth and development of licensing and
regulatory programs in national and international markets; (d) changes in
international, national, regional and local populations and disposable income
characteristics; and (e) 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, The Good Luck Club and Las
Vegas At Home Casino each operate in a highly competitive gaming industry. Based
upon data compiled by the Company, exclusive of the United States, its
territories and the Netherlands Antilles, these casinos compete, on a worldwide
basis, with over 250 interactive on-line casinos. Competition is likely to
increase as Internet and other forms of gaming continue to expand.
MARKETING STRATEGIES
The Company markets its services as a consultant to the Internet gaming
industry and to prospective gaming end-users through personal contacts with
industry leaders, attendance at industry conferences and presentations of the
Company's qualifications and credentials. In its role as consultant, the Company
develops marketing and distribution strategies for its clients, including
innovative promotional programs and focused marketing efforts.
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 that
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 on-line casinos and sports
wagering businesses has increased the pressure on national, provincial, state
and local governments to address Internet technologies and commercial activities
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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 gaming 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 Wire 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
gaming. 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 legislation similar to the Kyl Bill. Passage of the Kyl
Bill would operate to effectively prohibit all forms of casino style gaming 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.
The ultimate impact of the passage of the Kyl Bill upon the Company cannot be
determined at this time.
In May 1998, the Minnesota Supreme Court held that the State of
Minnesota has jurisdiction to press consumer fraud charges against an Internet
gaming 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 representations allegedly made by the defendants that the
`sports betting' services were legal. The State of Minnesota contended that
wagering on sporting events in Minnesota violated 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 a Web-site which (a) is accessible from within a
given jurisdiction and (b) seeks to solicit business or in fact transacts
business over
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the Internet in that state, subjects 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,
clients of the Company and its subsidiaries do not accept wagers from the United
States; accordingly, 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 evaluate
inasmuch as the government of Australia is still in the process of creating a
regulatory scheme 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.
The expansion of the Company's Internet related marketing efforts
through WMH and the launch of the Company's "Vegas At Home" portal web-site
("VAH portal") raises new business liability issues for the Company. Both the
low cost and worldwide reach of the Internet allows for targeted, quick and
interactive communications with industry businesses and their customers through
the use of banner ads, keywords and hyperlinks. At the same time, this access
presents unique legal issues concerning Internet advertising. As an advertising
portal, the VAH portal exposes the Company to liability for false,
misdescriptive, or misleading advertising, liability for copyright or trademark
infringement and various common law torts such as defamation or libel. Two
principal pieces of legislation, the Telecommunications Act of 1996, Section
230, known as the "safe harbor" for on-line service providers ("Section 230"),
and the Digital Millennium Copyright Act ("DMCA"), afford the Company a limited
degree of protection concerning the content, use and distribution of information
provided by clients utilizing the marketing potential of the VAH portal. Section
230 provides a broad exemption from liability as a publisher or speaker against
defamation and libel claims. The DMCA provides service providers with a limited
copyright "safe harbor" against infringement liability for the display or
distribution of materials subject to third party copyright protection. The
protection provided by the DMCA will vary to the extent that the VAH portal is
determined to "function primarily as a store" and not simply as a "conduit" or
provider of access to information. Similarly, Section 230 does not offer
protection against claims of infringement of intellectual property rights,
violation of criminal laws, and in certain other situations. The "safe harbors"
for service providers created by Section 230 and the DMCA provide protection
only within the United States. Consequently, the extent to which the VAH portal
operates internationally will, therefore, subject the Company to the laws of the
other jurisdictions in which it operates.
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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 and its subsidiaries 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 and WMH 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 the Company and its subsidiaries.
EMPLOYEES
As of June 30, 1999, the Company and its subsidiaries had 46 full-time
employees and one part-time employee. Of that amount, 16 are primarily dedicated
to Indian gaming and Internet gaming and 25 are dedicated to Cyberworks. The
remainder and certain employees of the Company who are dedicated to Indian and
Internet gaming perform executive and administrative services for the Company
and its subsidiaries.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's executive offices are located at 16868 Via Del Campo
Court, Suite 200, San Diego, California 92127, and consist of approximately
20,000 square feet under a lease that will expire in October 2002. Cyberworks'
executive offices are located in the same building. The Company also leases
approximately 1,000 square feet of office space in Santa Monica, California for
its Venture-Catalyst.com Division. That lease expires in March 2002. The Company
believes that the current facilities of the Company and its subsidiaries will be
adequate to meet the Company's needs for the foreseeable future. Should the
Company need additional space, management believes that the Company will be able
to secure additional space at reasonable rates.
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ITEM 3. LEGAL PROCEEDINGS
As of September 17, 1999, neither the Company nor any of its
subsidiaries was a party to any material, pending legal proceeding.
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 Common Stock as reported by The Nasdaq Stock Market, Inc. for the periods
indicated.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
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
FISCAL YEAR 1999
First Quarter............... $7.50 $2.30
Second Quarter.............. 6.00 2.69
Third Quarter............... 5.00 1.69
Fourth Quarter.............. 3.31 2.25
</TABLE>
HOLDERS
The number of shareholders of record as of September 17, 1999 was
3,174.
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.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
Inland Entertainment Corporation operates in three business segments:
(a) Indian Gaming Consulting; (b) Web-site development services; and (c)
Internet Gaming. Of the three segments, substantially all of the revenue earned
in Fiscal 1999 was attributable to Indian Gaming Consulting. Unless otherwise
specified in this Item 6, "Inland Entertainment Corporation" or the "Company"
refers to the Company and its subsidiaries.
INDIAN GAMING CONSULTING
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 the Amended and Restated Consulting Agreement, as amended by
Modification #1 to such agreement (hereinafter referred to as the "Barona
Consulting Agreement" or the "Consulting Agreement") which expires in March
2004. The total consulting fees paid to the Company under the Consulting
Agreement are 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
assets, if the recoverability is determined not to be probable, the Company will
charge to expense the unamortized portion.
In 1996, the Barona Casino became financially self-sufficient and the
Company's relationship with the Barona Tribe evolved from that of manager of the
Barona Casino to consultant to the Barona Tribe which became the manager of the
Barona Casino. Since the Company has transitioned from manager to consultant,
there have been only two types of investments by the Company to the Barona
Tribe. The first related to project commitments made when the Company was acting
as "manager" of the Barona Casino pursuant to the management
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agreement. Funds attributable to this category have equaled in the aggregate
approximately $550,000. The second investment category related to the $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 June 30, 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 Tribe or the Barona Casino in the form of deferred contract costs.
However, the Company will assist the Barona Tribe from time to time in obtaining
third party outside financing for the Barona Casino 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
Barona Casino's current expansion project.
WEB SITE DEVELOPMENT BUSINESS
On August 27, 1998, the Company acquired Cyberworks, Inc.
("Cyberworks"), a web-site developer and on-line marketing company. 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 ten months of Cyberworks' operating results
in the Company's consolidated financial statements for the fiscal year ended
June 30, 1999 ("Fiscal 1999"). Accordingly, current and future financial
statements may not be directly comparable to the Company's historical financial
statements. (See Notes to Consolidated Financial Statements, Note E.
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 four international Internet casinos; Casino Australia, the
Kenny Rogers Casino, The Good Luck Club and Las Vegas At Home Casino. 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. In
connection with the terms of a software licensing agreement, WMH is required to
invest a minimum of $120,000 per year of its own funds for marketing services to
promote the on-line casinos.
The Company has incurred significant costs in the last two fiscal years
to evaluate and pursue new business opportunities in the Internet gaming
industry. The Internet gaming business segment is now past the start-up phase
and the Company realized significant
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cost reductions during the last half of Fiscal 1999, compared with the first
half of Fiscal 1999, primarily in the areas of compensation, professional
services, advertising, marketing and promotion.
RESULTS OF OPERATIONS
TWELVE MONTHS ENDED JUNE 30, 1999 COMPARED WITH THE TWELVE MONTHS ENDED
JUNE 30, 1998
Revenue. Consolidated revenues increased 3.8% to $15,200,635 in Fiscal
1999 from $14,647,460 in Fiscal 1998. Despite revenue growth at the Barona
Casino, revenues from Indian gaming consulting decreased 9.7% to $13,214,099 in
Fiscal 1999 from $14,626,469 in Fiscal 1998, due to an increase in operating
expenses at that facility. Approximately 87% of the Company's Fiscal 1999
revenues were attributable to fees earned under the Consulting Agreement.
Revenues earned by Cyberworks from web-site development and on-line
marketing were $1,557,437 for approximately 10 months since its acquisition by
the Company on August 27, 1998.
Revenues earned by WMH for consulting services to Internet casinos were
$429,100 for Fiscal 1999, an increase from $20,991 in Fiscal 1998. The increase
was due to (a) increased activity in the Internet casinos marketed by WMH, (b)
additional casinos being serviced and (c) a full year of fees earned during
Fiscal 1999, as opposed to only three months of fees earned during Fiscal 1998.
Compensation and Benefits. Compensation and benefits expenses increased
42.4% to $4,801,998 for Fiscal 1999 from $3,372,974 for Fiscal 1998 primarily
due to the addition of the Cyberworks' employees. Full-time equivalent personnel
increased to 46 at June 30, 1999 from 18 at June 30, 1998.
Approximately $1.75 million in compensation and benefits expenses were
attributable to Cyberworks. These costs represented approximately 77% of
Cyberworks' total expenses. Because Cyberworks is in a growth phase, much of the
compensation and benefits expense related to the recruitment, training and
development of personnel which, in part, contributed to an operating loss before
taxes for Fiscal 1999 of approximately $172,000 for the Cyberworks subsidiary.
General and Administrative Expenses. General and administrative expenses
increased 54.9% to $7,579,061 for Fiscal 1999 from $4,894,429 for Fiscal 1998.
The increase in expenses was primarily the result of the following factors: (a)
start-up, advertising, promotion and support costs attributable to the four
on-line casinos to which the Company provided marketing services; (b)
approximately $800,000 in strategic political contributions relating to the
Indian Gaming Initiative ("Proposition 5") presented to the voters of California
on the November 1998 General Election Ballot; (c) third-party consulting fees
incurred by the
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Company in connection with its performance of consulting services to the Barona
Casino; (d) amortization of goodwill related to the acquisition of Cyberworks;
and (e) a write-off of capitalized costs associated with internally-developed
software.
The significant start up costs, advertising, promotion and support of
the on-line casinos, in conjunction with the write-off of capitalized costs
associated with internally-developed software, attributed to an approximately
$2.2 million operating loss before taxes for Fiscal 1999 for the Internet Gaming
business segment. This compares to an operating loss of approximately $1.6
million in Fiscal 1998.
Amortization of Deferred Contract Costs. Amortization of deferred
contract costs decreased 71.3% to $670,512 for Fiscal 1999 from $2,333,516 for
Fiscal 1998. 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. See Notes to Consolidated Financial Statements, Note B --
Barona Consulting Agreement.
Other Income and Expense. For Fiscal 1999, interest income was $597,960
compared to $648,315 for Fiscal 1998. The decrease was due to a decrease in the
Company's investments and cash equivalent balances during the year and due to
lower interest rates earned on investments during the last half of the year.
Interest expense increased to $708,333 in Fiscal 1999 from $538,040 in Fiscal
1998, primarily as a result of an increase in payment obligations due to two
shareholders, including a former director of the Company, in connection with the
repurchase of the Company's common stock held by them in September 1996. See
Notes to Consolidated Financial Statements, Note I -- Stock Repurchase/Long-Term
Debt.
Income Tax Provision. The income tax provision decreased 29.2% to
$1,247,000 for Fiscal 1999, based on income before taxes of $2,038,691 from
$1,760,879 in Fiscal 1998, based on income before taxes of $4,156,816. The
effective tax rate increased to approximately 61% in Fiscal 1999 from
approximately 42% in Fiscal 1998 because certain expenses, including
approximately $800,000 in political contributions and approximately $308,000 in
amortization of goodwill, are not deductible for tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity at June 30, 1999 consisted
of unrestricted cash and cash equivalents of $9,285,928 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 Fiscal 1999, the Company's cash position increased $80,426 to
$9,285,928 at June 30, 1999 from the June 30, 1998 balance of $9,205,502. The
increase was a result of cash flows provided by investing activities of
approximately $842,000 offset by cash flows used in operating activities of
approximately $609,000 and financing activities of approximately $153,000 during
the period.
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Cash flows used in operating activities included: (a) $3,190,146 in
short-term advances to the Barona Casino for the expansion project described in
Item 1. Description of Business, Indian Gaming Segment, Overview, herein; and
(b) increases in accounts receivable of approximately $163,000 primarily due to
Cyberworks' billings for services performed.
Cash flows provided by operating activities included: (a) amortization
of net deferred contract costs of approximately $671,000 which decreased net
deferred contract costs from $3,855,427 at June 30, 1998 to $3,184,915 at June
30, 1999; (b) depreciation on property and equipment of approximately $313,000;
(c) goodwill amortization of approximately $308,000 related to the acquisition
of Cyberworks; (d) establishment of a bad debt reserve of approximately $175,000
primarily for third-party loans; (e) an increase in income taxes payable of
approximately $158,000; (f) increases in accounts payable and accrued expenses
of approximately $125,000; (g) an increase in deferred revenues of approximately
$101,000 which represents payments received for future services to be performed
by Cyberworks; and (h) deferred compensation expense of approximately $97,000
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 $2,015,289 resulted from
short-term investments of $1,876,667 maturing during the year ended June 30,
1999, and payments on employee and third-party loans of $138,622. The
investments were comprised of Euro-dollar time deposits, commercial paper, and
banker's acceptances with original maturities greater than three months. The
Company had other similar investments as of June 30, 1999; however, these
investments have maturity lengths less than three months and are, therefore,
classified as cash and cash equivalents.
Cash flows used in investing activities of $1,172,893 include: (a) net
investments in fixed assets of approximately $280,000, consisting primarily of
computer equipment, software, leasehold improvements and a telephone system to
support the WMH business; (b) a $500,000 cash payment and $242,530 in
acquisition related expense payments for the purchase of Cyberworks (see Notes
to Consolidated Financial Statements, Note E - Acquisition); and (c) the
issuance of $150,000 in additional employee and third-party loans.
With respect to the current project to expand the Barona Casino, 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 June 30, 1999, the Company had advanced $3,190,146 and, as
of September 17, 1999, the Company had advanced approximately $4,300,000. 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 mid-fiscal 2000.
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<PAGE> 35
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 the
required capital investments in the Barona Casino; accordingly, the Company
invested approximately $2,500,000 into the Barona 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
difference between the June 30, 1999 balance in Advances of Future Consulting
fees of $2,603,457 and the $2,500,000 ($103,457) 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.
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 (a) an aggregate cash payment of $200,000 to such
shareholders upon closing, (b) 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, (c) 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 (d) 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 the 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
33
<PAGE> 36
Contingent Obligation is subject to the following conditions: (a) 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; (b) 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 (c) 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,
equal or exceed 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 three test periods.
The Company's long-term debt in connection with this stock repurchase is
$9,500,000 as of June 30, 1999. In addition, if all contingent obligations are
met, a maximum of $6,856,488 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 $2,144,000
include; (a) 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 (b) funds in
the amount of $2,011,393 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 $493,393 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 Fiscal 1999 on
the bonds held by the Company. (See Notes to Consolidated Financial Statements,
Note F - Restricted Cash and Other Investments.)
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
34
<PAGE> 37
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.
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 fourth quarter of Fiscal 1999. According to representations
made by Barona Casino management, they have (a) sent letters to critical vendors
requesting Year 2000 compliance and contingency plan information; (b) identified
problem systems; (c) implemented software "patches" on the food and beverage
tracking system; (d) substantially completed the replacement of all personal
computers to Year 2000 compliant hardware; (e) replaced servers; and (f)
purchased Year 2000 diagnostic software that will be used for additional testing
during the next few months. The Barona Casino has received several responses
from their critical vendors regarding such vendors' Year 2000 compliance and
contingency plans and they are in the process of reviewing these responses.
Additionally, the Barona Casino will evaluate the remaining areas to be
addressed prior to January 1, 2000 and may consider hiring an outside consultant
to facilitate additional testing and implementation required to address the Year
2000 issue.
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 compliant. If
the systems of the financial institutions, credit card processors, or others
involved in electronic commerce transactions are not Year 2000 compliant, there
can be no assurance that the supplier's software, in connection with these
products, will operate
35
<PAGE> 38
consistently in the Year 2000. The supplier is still 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, and is making
an attempt to obtain assurance from the credit card processors and other
suppliers of their Year 2000 readiness. 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 has requested and obtained 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 has completed the process for all identified
existing suppliers and customers, and 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 impact,
if any, that such a relationship(s), will have on the Company's and its
subsidiaries' operations. If it is determined that the Barona Casino has a Year
2000 compliance problem, 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.
As of June 30 and September 17, 1999, total costs relating to the
Company's compliance efforts, based upon management's best estimates, were
40 man hours of the Company's personnel and $3,400. 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.
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
36
<PAGE> 39
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.
UNCERTAINTIES RELATING TO INDIAN GAMING
Federal, State and tribal governments extensively regulate gaming on
Indian land. Class III gaming on Indian lands in California has been, and
continues to be, subject to uncertainty and risk.
Barona Compact. On August 12, 1998, a tribal-state compact was entered
into between the State of California and the Barona Tribe (the "Barona Compact")
and on October 22, 1998, approval of the Barona Compact by the U.S. Secretary of
the Interior became effective. The timing of the implementation of the Barona
Compact, including the phase-in period of the Indian Lottery Games is uncertain.
Currently, based upon an informal agreement between the State of California and
the Barona Tribe, the Barona Tribe is operating the 1,057 electronic gaming
devices which were in place prior to the time that the Barona Tribe entered into
the Barona Compact. The Barona Compact permits the play of different electronic
gaming machines, collectively referred to as "Indian Lottery Games." Such games
are premised on the concept that the patrons are playing against one another and
not the "house," since California currently prohibits banked games.
The Indian Lottery Games detailed in the Barona Compact are an unknown
factor and untested by the competitive environment of the casino floor. Based on
the limited testing, there is insufficient data to determine whether these
compact-defined devices will produce an income stream comparable to those
machines currently in play at the Barona Casino.
In August 1998, the California Legislature passed legislation ("AB
489") specifically authorizing the Governor of the State of California to
execute the various compacts which had been negotiated between the State of
California and the Indian tribes, including the Barona Tribe. Before such
legislation took effect, a referendum petition to overturn AB489 qualified for
the March 2000 California General Election. 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, in
addition to the administrative uncertainties relating to the Barona Compact,
there is a legal question whether the
37
<PAGE> 40
Governor's signature on the Barona Compact was sufficient to create a valid and
binding compact.
Unconstitutionality of Proposition 5. In August 1999, the California
Supreme Court ruled that those provisions of Proposition 5 which attempted to
amend the California constitutional prohibition against gaming were
unconstitutional. While this ruling did not effect the validity of the Barona
Compact, it did preclude the Barona Tribe, as well as other Indian tribes, from
entering into the "form" compact provided by Proposition 5, thereby allowing
such tribes to offer electronic games which more closely resembled "Las Vegas"
style electronic games and to expand the scope of gaming overall.
State Constitutional Amendment and a "New Barona Compact." On September
10, 1999, the California legislature approved State Constitutional Amendment 11
("SCA 11"), a proposed amendment to the California Constitution which would
significantly expand the scope of Indian gaming in the State of California and
would address the deficiencies of Proposition 5. If approved by the people of
California on the March 2000 General Election Ballot, SCA 11 would authorize the
Governor to negotiate and conclude tribal-state gaming compacts for the
operation of slot machines and for the conduct of lottery games and banking and
percentage card games by federally recognized Indian tribes on Indian lands in
California. On September 10, 1999, the State of California entered into
tribal-state compacts with 57 Federally recognized Indian tribes, including the
Barona Tribe. These compacts significantly expand the permissible scope of
Indian gaming beyond that permitted by the Barona Compact. The compacts are
subject to ratification by the California legislature, approval by the U.S.
Secretary of the Interior and approval of SCA 11 by the California voters. The
California legislature voted to ratify such compacts; however, there is no
assurance that the U.S. Secretary of the Interior will approve the Barona
Compact II or the voters of the State of California will vote to approve SCA 11.
Until the above-referenced conditions are satisfied, the Barona Compact shall
remain in effect. See the discussion of SCA 11 and the Barona Compact II in Item
1. "Description of Business, Indian Gaming Segment, State Regulations."
Consulting Agreement. 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 (a) a modification to the Consulting Agreement between
the Company and the Barona Tribe as a result of regulatory compliance
requirements or (b) 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 and the circumstances regarding the contractual relationship
between the Company and the Barona Tribe, reported financial information is not
necessarily indicative of the Company's future operating results or financial
condition.
38
<PAGE> 41
DEPENDENCY ON REVENUES FROM THE BARONA CASINO
The Company historically has derived substantially all of its income
from services provided to the Barona Tribe. While the Company is continuing to
take 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 in connection with its consulting
relationship with the Barona Tribe 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").
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 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.
VENTURE-CATALYST.COM
In July 1999, the Company formed an Internet business and investor
relations consulting division, "Venture-Catalyst.com," to serve as a consultant
to Internet entrepreneurial ventures in every stage of their financial growth.
In the course of its operation, the Company anticipates that
Venture-Catalyst.com will, at times, provide investment capital to companies and
may structure compensation arrangements which includes the receipt by it of
capital stock in payment for its services. Although not reflected in the
financial statements included in this Report, the Company has made and expects
to continue to make investments in personnel to allow the Venture-Catalyst.com
Division to grow.
39
<PAGE> 42
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.
INFLATION
To date, inflation has not had a material impact on the Company's
financial condition or its results of operations.
40
<PAGE> 43
ITEM 7. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants....................................... 42
Financial Statements:
Consolidated Balance Sheet -- June 30, 1999............................................ 43
Consolidated Statements of Operations -- Years Ended June 30, 1999 and 1998............ 44
Consolidated Statement of Shareholders' Equity -- Years Ended June 30, 1999 and 1998... 45
Consolidated Statements of Cash Flows -- Years Ended June 30, 1999 and 1998............ 46
Notes to Consolidated Financial Statements............................................. 47
</TABLE>
41
<PAGE> 44
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, 1999, and the related consolidated
statements of operations, shareholders' equity and cash flows for the years
ended June 30, 1999 and 1998. 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 audits 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, 1999, and the consolidated results of
its operations and its consolidated cash flows for the years ended June 30, 1999
and 1998, in conformity with generally accepted accounting principles.
/s/ GRANT THORNTON LLP
Los Angeles, California
August 11, 1999
42
<PAGE> 45
INLAND ENTERTAINMENT CORPORATION
CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 9,285,928
Accounts receivable 344,059
Prepaid expenses and other current assets 127,935
Due from Barona Casino - expansion project 3,190,146
-----------
Total current assets 12,948,068
NONCURRENT ASSETS:
Restricted cash and other investments 2,144,393
Employee and other receivables (net of allowance of $165,279) 265,134
Property, plant and equipment, net 1,073,111
Deferred contract costs, net 3,184,915
Deferred taxes 171,070
Goodwill, net of amortization 3,424,179
Deposits and other assets 422,984
-----------
Total noncurrent assets 10,685,785
-----------
Total assets $23,633,853
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Advances of future consulting fees -- Barona Casino $ 2,603,457
Current portion of long-term debt 400,000
Deferred revenues 125,072
Accounts payable and accrued expenses 1,440,349
Income taxes payable 386,745
-----------
Total current liabilities 4,955,623
LONG-TERM DEBT, LESS CURRENT PORTION 9,900,000
-----------
Total liabilities 14,855,623
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value, 100,000,000 shares authorized
and 4,753,786 shares outstanding 4,754
Additional paid in capital 1,297,808
Retained earnings 7,475,668
-----------
Total shareholders' equity 8,778,230
-----------
Total liabilities and shareholders' equity $23,633,853
===========
</TABLE>
The accompanying notes are an integral part of this statement.
43
<PAGE> 46
INLAND ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30,
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
REVENUES:
Indian gaming consulting $13,214,099 14,626,469
Other 1,986,536 20,991
----------- -----------
15,200,635 14,647,460
----------- -----------
OPERATING EXPENSES:
Compensation and benefits 4,801,998 3,372,974
General and administrative expenses 7,579,061 4,894,429
Amortization of deferred contract costs 670,512 2,333,516
----------- -----------
13,051,571 10,600,919
----------- -----------
Operating profit 2,149,064 4,046,541
OTHER INCOME AND (EXPENSE):
Interest income 597,960 648,315
Interest expense (708,333) (538,040)
----------- -----------
(110,373) 110,275
----------- -----------
Income before income taxes 2,038,691 4,156,816
Income tax provision 1,247,000 1,760,879
----------- -----------
NET INCOME $ 791,691 $ 2,395,937
=========== ===========
Net income per share -- basic $ .17 $ .62
=========== ===========
Net income per share -- diluted $ .16 $ .56
=========== ===========
Shares used in the computation of income per share -- basic 4,605,734 3,884,026
=========== ===========
Shares used in the computation of income per share -- diluted 4,977,338 4,254,704
=========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
44
<PAGE> 47
INLAND ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1999 AND 1998
<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, 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
Issuance of new shares.................. 750,000 750 3,044,250 3,045,000
Exercise of stock options............... 79,600 80 246,458 246,538
Granting of non-employee stock options.. 7,100 90,000 97,100
Additional consideration for 1996 stock
redemption............................ (2,000,000) (2,000,000)
Net income.............................. 791,691 791,691
--------- ------ ---------- -------- ---------- ----------
Balance at June 30, 1999.................. 4,753,786 $4,754 $1,297,808 $ $7,475,668 $8,778,230
========= ====== ========== ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
45
<PAGE> 48
INLAND ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30,
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Increase (decrease) in cash:
Net cash (used in) provided by operating activities:
Net income $ 791,691 $ 2,395,937
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,336,010 2,509,122
Provision for bad debts 174,805
Deferred taxes (43,088) 142,201
Compensation for granting of non-employee stock 97,100 142,825
options
Due from Barona Casino - expansion project (3,190,146)
Changes in assets and liabilities:
Accounts receivable (162,894) 18,456
Prepaid expenses and other current assets 23,928 (91,955)
Deposits and other assets (27,093) (381,323)
Accounts payable and accrued expenses 125,465 174,957
Deferred revenues 100,784
Income taxes payable 158,401 37,607
Advances of future consulting fees 6,527 423,795
----------- -----------
Net cash (used in) provided by operating (608,508) 5,371,622
activities
Cash flows provided by (used in) investing activities:
Purchase of Cyberworks, Inc. (742,530)
Maturity (purchase) of short-term investments 1,876,667 (1,876,667)
Acquisition of restricted cash (133,000)
Purchase of furniture and equipment (280,362) (1,040,163)
Payments of loans 138,622 6,244
Issuance of loans (150,000) (165,000)
Deferred contract costs (115,511)
----------- -----------
Net cash provided by (used in) investing
activities 842,396 (3,324,097)
----------- -----------
Cash flows provided by (used in) financing activities:
Payment of notes payable (400,000) (1,020,054)
Proceeds from exercise of stock options 246,538 173,953
----------- -----------
Net cash used in financing activities (153,462) (846,101)
----------- -----------
Net increase in cash 80,426 1,201,424
Cash at beginning of period 9,205,502 8,004,078
----------- -----------
Cash at end of period $ 9,285,928 $ 9,205,502
=========== ===========
Supplemental disclosures of cash flow information:
Interest expense paid $ 532,655 $ 443,121
=========== ===========
Income taxes paid $ 1,138,000 $ 1,569,108
=========== ===========
Settlement obligation $ 0 $ 230,409
=========== ===========
Redemption of common stock by issuance of $ 2,000,000 $ 2,000,000
notes payable =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
46
<PAGE> 49
INLAND ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
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. A substantial portion 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.
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. 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 and its subsidiaries. (See Note B. Barona Consulting Agreement and Note
C. Tribal State Compact.)
During fiscal years 1999 and 1998, in addition to Indian gaming, the
Company has pursued gaming and non-gaming Internet related business
opportunities including on-line marketing, web site development, e-commerce
applications and strategic Internet related consulting. 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 distribution
services for Internet related gaming businesses. WMH currently provides these
services to four Internet casinos. WMH is responsible for incurring all
marketing costs and is paid a fee for its services based upon the net profits of
each casino. (See Note L. Commitments and Contingencies.)
On August 27, 1998, the Company acquired all of the outstanding shares
of capital stock of Cyberworks, Inc. ("Cyberworks"), an Internet marketing and
web-site development company, for an aggregate purchase price, excluding
acquisition costs, of $3,560,000, consisting of $500,000 in cash and 750,000
shares of the Company's common stock, $.001 par value per share. Cyberworks is
operated as a wholly-owned subsidiary of the Company. As of June 30, 1999,
Cyberworks revenues represented approximately 10% of the Company's total
revenues.
47
<PAGE> 50
INLAND ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
2. BASIS OF ACCOUNTING
The Company reports revenues and expenses using the accrual method of
accounting.
3. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Cyberworks and WMH. All material
intercompany accounts and transactions have been eliminated.
4. DEFERRED CONTRACT COSTS
Pursuant to oral agreements with the Barona Tribe, the Company 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 (a) the Company had the ultimate
responsibility for such costs incurred in connection with developing the Barona
Casino and (b) 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 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. 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.
5. REVENUE RECOGNITION
Indian gaming consulting revenue is recorded as earned under the terms
of the Barona Consulting Agreement. Internet gaming consulting revenue is
recognized in the period in which it is earned. Web-site development and on-line
marketing revenues are recognized over the period of each project using
primarily the percentage-of-completion method using labor hours incurred as the
measure of progress towards completion. Provisions for project
48
<PAGE> 51
INLAND ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
adjustments and losses are recorded in the period such items are identified.
Deferred revenue represents amounts billed in advance of services being
performed.
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. The Company's cash equivalents consist
primarily of commercial paper, certificates of deposits and banker's acceptances
with maturities ranging from one month to three months. Interest rates earned
during Fiscal 1999 on such investments ranged from 4.6% to 5.7%.
7. 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 (three
to five years) of the assets. Accelerated methods of depreciation are used for
tax purposes.
8. ADVANCES OF FUTURE CONSULTING FEES
Advances of future consulting fees represent payments made to the
Company in excess of consulting fees earned. These advances are unsecured
and non-interest bearing.
9. 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 than not that a portion
of deferred tax assets will not be realized.
49
<PAGE> 52
INLAND ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
10. 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
shareholders by the weighted average shares outstanding during the period.
Diluted earnings per share is calculated by dividing net income available to
common shareholders 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. Below is the calculation of basic and diluted earnings per share
for the past two fiscal years:
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1999 1998
---------- ----------
<S> <C> <C>
Net income available to common shareholders $ 791,691 $2,395,937
========== ==========
Weighted average shares outstanding --
Basic 4,605,734 3,884,026
Effect of stock options 371,604 370,678
---------- ----------
Weighted average shares outstanding --
Diluted 4,977,338 4,254,704
========== ==========
Net income per common share:
Basic $ .17 $ .62
========== ==========
Diluted $ .16 $ .56
========== ==========
</TABLE>
Options to purchase 2,585,074 shares of the Company's common stock with
exercise prices ranging from $3.31 to $4.13 per share were outstanding during
Fiscal 1999. 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 June
2009 were still outstanding at June 30, 1999.
11. 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 M.
Stock Options, herein).
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.
50
<PAGE> 53
INLAND ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
12. 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.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
Management believes that the fair value of financial instruments
approximates their carrying amounts. The carrying value of the cash and cash
equivalents and restricted cash and other investments approximate their
estimated fair values. Management believes the fair values of notes payable and
notes receivable approximate their carrying values based on the current rates
for instruments with similar characteristics.
14. ADVERTISING, MARKETING AND PROMOTION COSTS
Advertising, marketing and promotion costs are expensed as incurred.
15. CERTAIN RECLASSIFICATIONS
Certain reclassifications have been made to conform to the 1999
presentation.
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
51
<PAGE> 54
INLAND ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
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. In
September 1999, the Company submitted the Modification to the NIGC. The review
commenced in March 1999 is currently pending.
The Company believes that the Amended and Restated Consulting
Agreement, as amended by the Modification, is not a management contract, based
on (a) the May 1996 and July 1997 determinations of the NIGC and BIA,
respectively, with respect to the Initial Consulting Agreement, (b) the NIGC's
findings in the January 1997 settlement agreement and (c) the nature 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 condition of the Company and its
subsidiaries. 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 and its subsidiaries.
NOTE C -- TRIBAL-STATE COMPACT
In August 1998, a Tribal-State Compact was signed between the State of
California and the Barona Tribe (the "Barona Compact"). The U.S. Secretary of
the Interior approved the Barona Compact, effective October 22, 1998.
The initial term of the Barona Compact will end 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 to have committed violations of the terms of the Barona Compact on
five or more occasions.
52
<PAGE> 55
INLAND ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
Rather than the electronic machines currently in play at the Barona
Casino, the Barona Compact permits the following two varieties of Indian Lottery
Games: (a) Indian Video Lottery Match Game, and (b) Indian Video Lottery
Scratcher Game. 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.
Pursuant to an informal agreement with the California Division of Gaming
Control (the "Gaming Control Division"), the Barona Tribe has been permitted to
continue to operate its current 1,057 electronic gaming devices at the Barona
Casino for an indefinite period of time. With the consent of the Gaming Control
Division, of the 1,057 electronic gaming devices being operated at the Barona
Casino, 8 are prototypes of the Indian Gaming Machines prescribed by the Barona
Compact. At the present time, there are no such Indian Lottery devices available
to any compacted Indian tribe in California other than for testing purposes.
The Indian Lottery Games are not similar in functional capability to any
existing electronic gaming device or conventional slot machine, have not yet
been commercially produced and are currently being tested in a public
environment. Based upon the limited testing, there is insufficient data to
determine whether these 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.
(See Note O -- Subsequent Events.)
53
<PAGE> 56
INLAND ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE D -- DUE FROM BARONA CASINO - EXPANSION PROJECT
The Barona Tribe is in the planning stages of an approximately $120
million expansion project. The Company is 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 June 30, 1999, the Company has advanced $3,190,146;
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 mid-fiscal 2000.
NOTE E -- ACQUISITION
On August 27, 1998, the Company acquired all of the outstanding shares
of capital stock of Cyberworks in exchange for 750,000 shares of its common
stock and $500,000 in cash, in a transaction valued, exclusive of acquisition
costs, at $3,560,000. 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 June 30, 1999.
The excess of the total acquisition cost over the fair value of net
assets acquired ("goodwill") is being amortized on a straight-line basis over 10
years. Goodwill net of
54
<PAGE> 57
INLAND ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
amortization as of June 30, 1999 is $3,424,179 and amortization expense of
$307,915 has been recorded through June 30, 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.
55
<PAGE> 58
INLAND ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
The following unaudited pro forma consolidated results of operations
assume that the purchase occurred on July 1, 1997:
<TABLE>
<CAPTION>
YEAR-TO-DATE ENDED JUNE 30,
------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Revenues $15,343,000 $15,723,000
Net income $ 669,918 $ 2,061,000
Net income per share -- basic $0.14 $0.44
Net income per share -- diluted $0.13 $0.41
</TABLE>
NOTE F -- 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 $493,393 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 Fiscal 1999 on the bonds held by the Company.
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.
NOTE G -- DEFERRED CONTRACT COSTS
Deferred contract costs consist of the following at June 30, 1999:
<TABLE>
<S> <C>
Deferred contract costs under Consulting
and Operations Agreements $ 15,601,411
Less: accumulated amortization (12,416,496)
------------
$ 3,184,915
============
</TABLE>
56
<PAGE> 59
INLAND ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE H -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at June 30,
1999:
<TABLE>
<S> <C>
Leasehold improvements $ 528,454
Computer equipment and software 552,510
Equipment 249,231
Furniture 152,811
Automotive equipment 125,238
----------
1,608,244
Accumulated Depreciation (535,133)
----------
$1,073,111
==========
</TABLE>
NOTE I -- 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 reached
certain levels during measurement periods prior to March 4, 1999, the former
shareholder would have been entitled to up to $250,000 in additional
compensation. The stock price did not reach those levels during the measurement
period; accordingly, the Company incurred no further obligation.
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 (a) an aggregate cash payment of $200,000 to such
shareholders upon closing, (b) 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, (c) 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 (d) 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 the 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
57
<PAGE> 60
INLAND ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
eight successive years that commenced with the fiscal year ended June 30, 1997.
The Second Contingent Obligation is subject to the following conditions: (a) 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; (b) 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 (c) 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,
equal or exceed 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 three test periods;
accordingly, $2,000,000 in obligations were recorded at June 30, 1997, 1998 and
1999, respectively, and have been treated as additional consideration for the
common stock repurchased under the Stock Purchase Agreement.
The Company's long-term debt related to this stock repurchase was
$9,500,000 as of June 30, 1999. In addition, if all contingent obligations are
met, a maximum of $6,856,488 of aggregate additional consideration may still
have to be repaid 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 benefited 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,
1999, includes $800,000 relating to the January Settlement Agreement, of which
$400,000 is currently payable.
58
<PAGE> 61
INLAND ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
Debt payments related to the Stock Repurchase Obligation referenced
above in Note I. Stock Repurchase/Long-Term Debt. 1. Stock Repurchase
Obligation, and the NIGC Settlement are scheduled as follows:
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------------------------------
2000 2001 2002 2003 2004 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 #3 333,333 333,334 333,333 1,000,000
Ungar Note #4 333,333 666,667 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 #3 333,333 333,334 333,333 1,000,000
Woods Note #4 333,333 666,667 1,000,000
Barona Tribe. $400,000 $ 400,000 800,000
-------- ---------- ---------- ----------- ---------- ---------- -----------
Total $400,000 $1,566,667 $1,833,333 $ 2,500,000 $2,000,000 $2,000,000 $10,300,000
======== ========== ========== =========== ========== ========== ===========
</TABLE>
NOTE J - SEGMENT REPORTING
The Company has three reportable segments: Indian Gaming, Internet
Gaming, and Web-Site Development Services. (For an overview and detailed
description of each reportable segment see Item 1. Description of Business.)
The Company identifies segments based on how management organizes the
business units to make operating decisions and to assess each segment's
performance. The Company's reportable segments are managed and evaluated
separately because they are business units that offer distinct services in
different industries.
The Company evaluates performance and allocates resources based on
profits (or losses) from operations before income taxes. The accounting policies
of the reportable segments are the same as those described in the summary of
significant accounting policies. Inter-segment sales are recorded at rates
similar to those received in the external marketplace and, therefore, impact the
profits (or losses) of the business segments.
59
<PAGE> 62
INLAND ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
Information on segments and reconciliation to income, before income
taxes, for the fiscal years ending June 30, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
INDIAN INTERNET WEB-SITE ADJUSTMENTS/ CONSOLIDATED
GAMING GAMING DEVELOPMENT ELIMINATIONS TOTALS
----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
For the year ending June 30, 1999:
Revenues (external) $13,214,098 $ 429,100 $1,557,437 $15,200,635
Revenues (intersegment) $ 537,843 $ (537,843) $ --
Depreciation and amortization $ 1,262,095 $ 45,000 $ 28,916 $ 1,336,011
Net interest expense (income) $ 111,739 $ (1,366) $ 110,373
Segment operating profit/(loss) $ 4,378,058 $(2,167,310) $ (172,057) $ 2,038,691
Total assets $25,772,884 $ 393,999 $ 374,577 $(2,918,695) $23,622,765
Expenditures for long lived assets $ 242,861 $ 37,164 $ 280,025
For the year ending June 30, 1998:
Revenues (external) $14,626,469 $ 20,991 $14,647,460
Revenues (intersegment)
Depreciation and amortization $ 2,509,692 $ 11,250 $ 2,520,942
Net interest expense (income) $ (109,798) $ (477) $ (110,275)
Segment operating profit/(loss) $ 5,744,168 $(1,587,351) $ 4,156,817
Total assets $19,792,616 $ 292,098 $ (811,159) $19,273,555
Expenditures for long lived assets $ 1,129,657 $ 225,000 $ 1,354,657
</TABLE>
60
<PAGE> 63
INLAND ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE K -- INCOME TAXES
Deferred taxes are comprised of the following at June 30, 1999:
<TABLE>
<S> <C>
Excess of financial statement over tax deferred contract costs $(136,006)
Excess of tax over financial statement fixed asset depreciation (76,166)
Capitalized WMH losses 94,015
Deferred compensation related to non-employee stock options 102,783
California franchise taxes 99,754
Allowance for doubtful accounts 82,200
Deferred state taxes 4,490
---------
Deferred tax asset $ 171,070
=========
</TABLE>
The composition of the Company's income tax provision is as follows:
<TABLE>
<CAPTION>
JUNE 30,
----------------------------
1999 1998
---------- ----------
<S> <C> <C>
Current tax:
Federal $ 985,651 $1,242,721
State 304,437 375,957
---------- ----------
Current tax 1,290,088 1,618,678
Deferred tax:
Federal (29,651) 101,709
State (13,437) 40,492
---------- ----------
Deferred tax (43,088) 142,201
---------- ----------
Income tax provision $1,247,000 $1,760,879
========== ==========
</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,
----------------
1999 1998
---- ----
<S> <C> <C>
U.S. Federal statutory rate 34.0% 34.0%
Permanent Differences 21.8% 1.7%
State income taxes 6.0% 6.0%
Other (.6%) .7%
---- ----
61.2% 42.4%
==== ====
</TABLE>
61
<PAGE> 64
INLAND ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE L -- COMMITMENTS AND CONTINGENCIES
1. WORLDWIDE MEDIA HOLDINGS, N.V.
In March 1998, WMH entered into a five-year Software License and Support
Agreement (the "Software Agreement") for on-line casino technology and support.
The initial license fee is being amortized over the life of the Software
Agreement. WMH's marketing fees are computed 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.
2. LEASE OBLIGATIONS
The Company and its employees have entered into operating leases for
facilities, equipment and automobiles that expire at various dates through
fiscal 2003. The minimum future payments due under operating lease contracts at
June 30, 1999 for the years ending June 30 are as follows:
<TABLE>
<S> <C>
2000 $255,176
2001 257,415
2002 256,890
2003 84,178
--------
Net minimum lease payments $853,660
========
</TABLE>
Rental expense for Fiscal 1999 and Fiscal 1998 was $325,896 and
$286,030, respectively.
3. 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 various 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 $227,000. The Company also has guaranteed loans to certain Barona
Casino employees totaling approximately $70,000.
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.
4. COMPANY LITIGATION
As of June 30, 1999, the Company was not subject to any material,
pending legal proceedings or claims.
62
<PAGE> 65
INLAND ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE M -- 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. Currently, options to purchase 41,756 shares of the
Company's common stock are outstanding and immediately exercisable under the
1994 Plan.
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. In
December 1998, 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 3,000,000. Shares covered by options that
terminate without exercise are available for re-issuance. Options may be issued
to employees, consultants and directors of the Company either as (a) incentive
stock options or (b) non-statutory stock options.
Stock options are granted 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 may have a maximum term of up to 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
63
<PAGE> 66
INLAND ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
options, and the option price will be equal to the closing price of the
Company's common stock on the date of grant.
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>
FOR THE YEAR ENDED:
--------------------------------------------------------------
JUNE 30, 1999 JUNE 30, 1998
----------------------------- ----------------------------
OPTIONS OPTION PRICE OPTIONS OPTION PRICE
OUTSTANDING PER SHARE OUTSTANDING PER SHARE
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 5,195,240 $1.00-$4.13 3,325,062 $1.00-$3.75
Granted 739,000 $2.75-$3.50 1,989,816 $2.50-$4.13
Exercised (79,600) $2.75-$3.50 (69,638) $1.00-$3.63
Cancelled (353,500) $2.75-$4.13 (50,000) $ 2.88
--------- ---------
Outstanding at end of year 5,501,140 $1.00-$4.13 5,195,240 $1.00-$4.13
--------- ---------
Options exercisable at year end 2,743,036 $1.00-$4.13 1,848,032 $1.00-$4.13
Weighted avg. fair value of options granted $ 2.47 $ 2.62
</TABLE>
The following table summarizes information concerning options
outstanding at June 30, 1999:
<TABLE>
<CAPTION>
WEIGHTED
-AVERAGE
REMAINING
RANGE OF NUMBER CONTRACTUAL NUMBER
EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISABLE
--------------- ----------- ------------ -----------
<S> <C> <C> <C>
$1.00 - $3.00 2,969,818 8.28 1,003,818
$3.01 - $4.13 2,531,322 6.12 1,739,218
--------- ---------
5,501,140 2,743,036
========= =========
</TABLE>
The Company granted options to purchase 102,500 shares of the Company's
common stock (of which 5,000 have been subsequently canceled), and options to
purchase 610,000 shares of the Company's common stock (of which 175,000 have
been subsequently canceled), to non-employees during fiscal 1999 and fiscal
1998, respectively, and recognized expense related to these options of $97,100
and $142,825 in fiscal 1999 and 1998, respectively. The expense amount was
determined by the fair value of the services provided in return for the options
granted.
64
<PAGE> 67
INLAND ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
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,
----------------------------
1999 1998
------------ ----------
<S> <C> <C>
Net income (loss)
As reported $ 791,691 $2,395,937
Pro forma $(1,159,530) $ 236,060
Net income (loss) per share
As reported $ 0.16 $ 0.56
Pro forma $ (0.23) $ 0.06
</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 fiscal 1999 and 1998,
respectively: dividend yield, 0.0% for both years; expected volatility of 1.24
and 1.27, respectively; average risk-free interest rates of 4.7% and 5.6%,
respectively; and expected lives of approximately 7 and 5 years; respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require 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 N -- 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, 1999, the only costs incurred by the Company have been minor administrative
fees.
65
<PAGE> 68
INLAND ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE O -- EVENTS (UNAUDITED) SUBSEQUENT TO DATE OF AUDITOR'S REPORT
On September 10, 1999 the Governor of the State of California entered
into tribal-state compacts with 57 Federally recognized Indian tribes, including
the Barona Tribe. The compacts are subject to ratification by the California
Legislature, approval by the U.S. Secretary of the Interior and passage of
related California legislation. On September 10, 1999, the California
legislature voted to ratify these compacts, including the Barona Compact II.
There is no assurance that the remaining conditions will be satisfied. The new
tribal-state compacts significantly expand the permissible scope of Indian
gaming beyond that permitted by the Barona Compact. Until the above-referenced
conditions are satisfied, the Barona Compact shall remain in effect.
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 1999, 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 1999.
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.
66
<PAGE> 69
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.
67
<PAGE> 70
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.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
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"), 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, 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, is hereby
incorporated herein by reference.
2.4 Asset Purchase Agreement dated as of July 16, 1999 by and among the
Company, Typhoon Capital Consultants, LLC, Sanjay Sabnani and
Manisha Sabnani.
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"), 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), is hereby incorporated herein
by reference.
3.3 Amended and Restated By-laws of the Company, 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"),
is hereby incorporated herein by reference.
</TABLE>
68
<PAGE> 71
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
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, 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 27,
1998 filed with the Commission on October 28, 1997 (File No.
0-11532), is hereby incorporated herein by reference.
10.3 The Company's 1996 Non-employee Directors Stock Option Plan,
previously filed as Exhibit 10.3 to the Company's Annual Report on
Form 10-KSB for the Fiscal Year Ended June 30, 1998, filed with the
Commission on September 28, 1998 (File No. 0-11532) (the "Fiscal
1998 Annual Report"), is hereby incorporated by reference.
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"), 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, is hereby
incorporated herein by reference.
10.6 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, is hereby
incorporated herein by reference.
10.7 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, is hereby
incorporated herein by reference.
10.8 Employment Agreement by and between the Company and Sanjay Sabnani,
dated July 16, 1999.
OTHER MATERIAL CONTRACTS
10.9 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,
</TABLE>
69
<PAGE> 72
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
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"), is hereby incorporated herein by reference.
10.10 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, is hereby
incorporated herein by reference.
10.11 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, is hereby incorporated herein by reference.
10.12 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, is hereby
incorporated herein by reference.
10.13 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, is hereby incorporated herein by reference.
10.14 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"), is hereby incorporated herein by reference.
10.15 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, is hereby incorporated
herein by reference.
10.16 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, is hereby
incorporated herein by reference.
10.17 Promissory Note dated September 15, 1997 in favor of Jonathan Ungar
in the principal amount of $1,000,000, previously filed as Exhibit
10.19 to the Fiscal 1998 Annual Report, is hereby incorporated by
reference.
10.18 Promissory Note dated September 15, 1997 in favor of Alan Henry
</TABLE>
70
<PAGE> 73
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
Woods in the principal amount of $1,000,000, previously filed as
Exhibit 10.20 to the Fiscal 1998 Annual Report, is hereby
incorporated by reference.
10.19 Promissory Note dated September 15, 1998 in favor of Jonathan Ungar
in the principal amount of $1,000,000, previously filed as Exhibit
10.21 to the Fiscal 1998 Annual Report, is hereby incorporated by
reference.
10.20 Promissory Note dated September 15, 1998 in favor of Alan Henry
Woods in the principal amount of $1,000,000, previously filed as
Exhibit 10.22 to the Fiscal 1998 Annual Report, is hereby
incorporated by reference.
10.21 Promissory Note dated September 15, 1999 in favor of Jonathan Ungar
in the principal amount of $1,000,000.
10.22 Promissory Note dated September 15, 1999 in favor of Alan Henry
Woods in the principal amount of $1,000,000.
10.23 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), is hereby incorporated herein by reference.
10.24 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), is hereby incorporated herein
by reference.
10.25 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, is hereby incorporated herein by reference.
10.26 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, is hereby incorporated herein by reference.
10.27 Consulting and Marketing Agreement dated as of March 12, 1998 by and
between the Company and Worldwide Media Holdings, N.V.
21 Subsidiaries of Registrant.
23 Consent of Grant Thornton LLP.
</TABLE>
71
<PAGE> 74
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule.
</TABLE>
(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.
72
<PAGE> 75
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 27, 1999 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>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ L. DONALD SPEER, II Chairman of the Board and September 27, 1999
- -------------------------- Chief Executive Officer,
L. Donald Speer, II President and Chief Operating Officer
And Director
(Principal Executive Officer)
/s/ RICHARD T. HARRISON President and Chief Operating Officer of September 27, 1999
- -------------------------- Cyberworks, Inc., a wholly-owned subsidiary
Richard T. Harrison of the Company, and a Director
/s/ ANDREW B. LAUB Executive Vice President, September 27, 1999
- -------------------------- Chief Financial Officer,
Andrew B. Laub Treasurer and a Director
(Principal Financial Officer)
/s/ G. FRITZ OPEL Executive Vice President, September 27, 1999
- -------------------------- Marketing and Consulting
G. Fritz Opel Services and a Director
/s/ SANJAY SABNANI Vice President, Investor Relations Officer, September 27, 1999
- -------------------------- President of Venture-Catalyst.com, a Division
Sanjay Sabnani of the Company and a Director
</TABLE>
73
<PAGE> 76
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ THOMAS G. HOLMES Vice President of Technology September 27, 1999
- -------------------------- and a Director
Thomas G. Holmes
/s/ JANA MCKEAG Vice President, Governmental September 27, 1999
- -------------------------- Relations and a Director
Jana McKeag
/s/ KEVIN MCINTOSH Controller September 27, 1999
- -------------------------- (Principal Accounting Officer)
Kevin McIntosh
/s/ CHARLES REIBEL Director September 27, 1999
- --------------------------
Charles Reibel
/s/ CORNELIUS E. SMYTH Director September 27, 1999
- --------------------------
Cornelius E. ("Neil") Smyth
</TABLE>
74
<PAGE> 77
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
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"), 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, 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, is hereby
incorporated herein by reference.
2.4 Asset Purchase Agreement dated as of July 16, 1999 by and among the
Company, Typhoon Capital Consultants, LLC, Sanjay Sabnani and
Manisha Sabnani.
3.1 Amended and Restated Articles of Incorporation of the Company,
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"), 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), 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"), is hereby
incorporated herein by reference.
</TABLE>
75
<PAGE> 78
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
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, 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 27,
1998 filed with the Commission on October 28, 1997 (File No.
0-11532), is hereby incorporated herein by reference.
10.3 The Company's 1996 Non-employee Directors Stock Option Plan,
previously filed as Exhibit 10.3 to the Company's Annual Report on
Form 10-KSB for the Fiscal Year Ended June 30, 1998, filed with the
Commission on September 28, 1998 (File No. 0-11532) (the "Fiscal
1998 Annual Report"), is hereby incorporated by reference.
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"), 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, is hereby
incorporated herein by reference.
10.6 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, is hereby
incorporated herein by reference.
10.7 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, is hereby
incorporated herein by reference.
10.8 Employment Agreement by and between the Company and Sanjay Sabnani,
dated July 16, 1999.
OTHER MATERIAL CONTRACTS
10.9 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
</TABLE>
76
<PAGE> 79
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"), is hereby incorporated herein by reference.
10.10 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, is hereby
incorporated herein by reference.
10.11 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, is hereby incorporated herein by reference.
10.12 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, is hereby
incorporated herein by reference.
10.13 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, is hereby incorporated herein by reference.
10.14 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"), is hereby incorporated herein by reference.
10.15 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, is hereby incorporated
herein by reference.
10.16 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, is hereby
incorporated herein by reference.
10.17 Promissory Note dated September 15, 1997 in favor of Jonathan Ungar
in the principal amount of $1,000,000, previously filed as Exhibit
10.19 to the Fiscal 1998 Annual Report, is hereby incorporated by
reference.
10.18 Promissory Note dated September 15, 1997 in favor of Alan Henry
Woods in the principal amount of $1,000,000, previously filed as
Exhibit 10.20 to the Fiscal 1998 Annual Report, is hereby
77
<PAGE> 80
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
incorporated by reference.
10.19 Promissory Note dated September 15, 1998 in favor of Jonathan Ungar
in the principal amount of $1,000,000, previously filed as Exhibit
10.21 to the Fiscal 1998 Annual Report, is hereby incorporated by
reference.
10.20 Promissory Note dated September 15, 1998 in favor of Alan Henry
Woods in the principal amount of $1,000,000, previously filed as
Exhibit 10.22 to the Fiscal 1998 Annual Report, is hereby
incorporated by reference.
10.21 Promissory Note dated September 15, 1999 in favor of Jonathan Ungar
in the principal amount of $1,000,000.
10.22 Promissory Note dated September 15, 1999 in favor of Alan Henry
Woods in the principal amount of $1,000,000.
10.23 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), is hereby incorporated herein by reference.
10.24 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), is hereby incorporated herein
by reference.
10.25 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, is hereby incorporated herein by reference.
10.26 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, is hereby incorporated herein by reference.
10.27 Consulting and Marketing Agreement dated as of March 12, 1998 by and
between the Company and Worldwide Media Holdings, N.V.
21 Subsidiaries of Registrant.
23 Consent of Grant Thornton LLP.
27 Financial Data Schedule.
</TABLE>
78
<PAGE> 1
EX - 2.4
ASSET PURCHASE AGREEMENT
BY AND AMONG
INLAND ENTERTAINMENT CORPORATION,
TYPHOON CAPITAL CONSULTANTS, LLC,
SANJAY SABNANI
AND
MANISHA SABNANI
DATED AS OF JULY 16, 1999
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
SECTION DESCRIPTION PAGE
<S> <C> <C>
Recitals 1
1 Purchase and Sale of Assets 1
2 Purchase Price 2
3 Certain Covenants 2
4 Closing 5
5 Representations and Warranties of Seller 5
6 Representations and Warranties of Buyer 8
7 Survival of Representations and Warranties 9
8 Costs 10
9 Miscellaneous 11
Signature Page 14
</TABLE>
(i)
<PAGE> 3
INDEX TO SCHEDULES AND EXHIBITS
SCHEDULE DESCRIPTION
1.1(a) Acquired Assets
1.1(c) Excluded Liabilities
2.1(b) Allocation of the Purchase Price
3.2(b) Seller Contracts
5.6 No infringement
EXHIBIT DESCRIPTION
A Assignment and Assumption of Lease and Landlord Consent
Agreement
B Assignment Agreement re: Domain Names
C Bill of Sale
D Employment Agreement for Sanjay Sabnani
E Assignment and Assumption Agreement re: Typhoon Capital
Consultants LLC's Equipment Leases
The Schedules and Exhibits referenced above have not been filed with
the Asset Purchase Agreement. The Registrant will furnish supplementally a copy
of any omitted schedule or exhibit to the U.S. Securities and Exchange
Commission upon request.
(ii)
<PAGE> 4
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT ("Agreement"), dated as of July 16,
1999, is made by and among Inland Entertainment Corporation, a Utah corporation
(the "Buyer"), Typhoon Capital Consultants, LLC, a California limited liability
company (the "Seller"), Sanjay Sabnani and Manisha Sabnani, the members of the
Seller (each, a "Member"; collectively, the "Members").
R E C I TA L S:
A. The Seller is in the business of offering investor relations
and other complementary financial and non-financial advisory services (the
"Business").
B. The Seller desires to sell certain assets relating to the
Business to the Buyer, and the Buyer desires to purchase such assets and assume
certain liabilities relating thereto.
NOW, THEREFORE, in consideration of the premises and the mutual
representations, warranties, covenants and agreements hereinafter set forth, the
parties hereto agree as follows:
1. PURCHASE AND SALE OF ASSETS
1.1 Assets and Liabilities.
(a) Acquired Assets. Upon the terms and subject to the
conditions of this Agreement, as of the Closing, the Buyer shall purchase from
the Seller, and the Seller shall sell, assign, transfer and convey to the Buyer,
all of the Seller's right, title and interest in and to all of the assets set
forth on Schedule 1.1(a) hereto (collectively, the "Purchased Assets").
(b) Excluded Assets. The Seller shall not sell, assign,
transfer or convey to the Buyer and the Buyer shall not purchase any of the
assets used in the Business other than those specifically set forth on Schedule
1.1(a).
(c) Liabilities Assumed by Buyer. Upon the terms and
subject to the conditions of this Agreement, and in reliance on the
representations, warranties, covenants and agreements made by the Seller and the
Members herein, effective after the Closing Date, the Buyer shall assume and be
obligated pursuant to this Agreement to pay when due, perform, or discharge only
the debts, claims, liabilities, obligations, damages
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<PAGE> 5
and expenses set forth on Schedule 1.1(c) hereto (collectively, the "Assumed
Liabilities").
(d) Excluded Liabilities. Except as set forth on Schedule
1.1(c) hereto, the Buyer shall not assume any obligations with respect to the
Business arising as a result of the conduct or operation of the Business
(including, without limitation, any obligations resulting from the failure to
comply with, or any violations of, any laws or regulations, of any nature or
kind), and the Seller and the Members shall each retain all of their existing
liabilities.
2. PURCHASE PRICE.
2.1 Purchase Price.
(a) Purchase Price. The aggregate purchase price (the
"Purchase Price") for the Purchased Assets shall be One Hundred Thousand Dollars
($100,000), payable in full to the Seller on the Closing Date, by company check
of the Buyer.
(b) Allocation of Purchase Price. The Purchase Price shall
be allocated among the Purchased Assets as set forth on Schedule 2.1(b) hereto.
Each party agrees that it will not in its tax returns or elsewhere take a
position inconsistent with the allocations provided for in this Section.
2.2 Taxes. The Buyer and the Seller will share equally the costs
of all sales and use taxes and transfer taxes, if any, applicable to the
transfer of the Purchased Assets and the assumption of the Assumed Liabilities
provided for by this Agreement. The Buyer and the Seller shall each pay its
portion, prorated as of the Closing Date, of state and local real and personal
property taxes with respect to the Purchased Assets.
3. CERTAIN COVENANTS.
3.1 Employees. The Seller acknowledges that it has accepted,
effective as of the end of business on July 15, 1999, the resignations of David
Bronte, John Lake and Donna Villegas. The Buyer agrees that it will offer
employment to Messrs. Bronte and Lake, Ms. Villegas as well as Mr. Evan
Anderson.
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<PAGE> 6
3.2 Winding Up of the Business by the Seller.
(a) Office and Equipment Leases. The Seller and the
Members each agree to use its and their best efforts to secure the required
consents to the assignments in favor of the Buyer of leases for (i) the Seller's
present office space located at 3420 Ocean Park Boulevard, Suite 3020, Santa
Monica, California 90405 (the "Leased Real Property"), substantially in the form
of the Assignment and Assumption of Lease and Landlord Consent Agreement (the
"Lease Assignment") attached hereto as Exhibit A, (ii) office equipment (the
"Typhoon Equipment Leases"), and (iii) all licenses, authorizations, consents,
orders and regulatory approvals of Governmental Entities necessary for the
consummation of the transactions contemplated hereby, each pursuant to forms of
consent reasonably acceptable to the Buyer. If any such consents may not
reasonably be obtained, the Seller and the Buyer agree to use their combined
best efforts to lease such alternate office space and equipment, and to secure
the necessary consents and approvals from Governmental Entities as shall be
reasonably necessary to conduct a business at the Leased Real Property Location.
The Seller and the Members shall remain liable for any and all costs and
expenses related to the Leased Real Property, the Typhoon Equipment Leases, and
regulatory licenses and permits (including all fees related thereto) currently
in effect, until the date the required consents are obtained or the respective
leases are terminated.
(b) Termination of Seller Contracts. On the first business
day following the Closing, the Seller shall forward by Federal Express, next day
delivery, or by same day messenger delivery, termination notices, in a form
acceptable to the Buyer, relating to persons holding Seller Contracts (as
hereinafter defined), to terminate such contracts, in each case at the earliest
possible date consistent with the terms of such contracts (each, a "Termination
Date"). Any and all payments due to the Seller pursuant to Seller Contracts
until and including their respective dates of termination shall be paid to the
Seller. As used herein, "Seller Contracts" shall mean all contracts listed on
Schedule 3.2(b). The Seller and the Members shall use their best efforts to
request that holders of the Seller Contracts waive the respective minimum
termination notice provisions to enable the Seller Contracts to be terminated as
soon as possible after the Closing Date. For purposes of this Agreement, with
respect to a particular Seller Contract, a "Termination Date" shall mean the
earliest date of termination of a Seller Contract.
(c) Conduct of the Business. The Seller and each of the
Members agree that from on and after the Closing Date (a) not to modify any of
the Seller Contracts (other than by terminating them), (b) not to conduct the
Business of the Seller except as it relates to terminating the Seller Contracts,
(c) to use their respective best efforts to induce the respective counterparties
to the Seller Contracts to enter into new service contracts with the Buyer with
respect to the same or similar services, and (d) not
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<PAGE> 7
to cancel any debts or affirmatively waive any claims or rights which relate, or
could relate, to the Purchased Assets or Assumed Liabilities, without the
consent of the Buyer.
(d) Regulatory Matters. The Seller and, if applicable, the
Members shall (i) file with applicable Governmental Entities the applications
and related documents required to be filed by them (and prosecute diligently any
related proceedings) in order to transfer to the Buyer any required
Authorizations necessary to conduct business at the Leased Real Property or to
otherwise conduct business in a similar manner to that conducted by the Seller
prior to the Closing and (ii) cooperate with each other as may reasonably be
requested in connection with the foregoing.
3.3 Appointment as a Director and Executive Officer. Immediately
after the Closing, the Buyer shall elect Sanjay Sabnani as a member of the Board
of Directors of the Buyer and as Vice President, Investor Relations Officer and
President of the Internet Consulting Division of the Buyer.
3.4 Fictitious Business Name Statement. Immediately after the
Closing, the Seller and the Members shall file with the appropriate governmental
agencies all documents necessary to effect a relinquishment of the fictitious
business name, "venture-catalyst.com" and shall pay all fees in connection
therewith.
3.5 Publicity. The Seller shall not issue any press release or
public announcement of any kind concerning, or otherwise publicly disclose, any
matters described in this Agreement without the Buyer's prior consent.
3.6 Further Assurances. On and after the Closing Date, the Seller
and the Members shall, at the request of the Buyer, execute, acknowledge, and
deliver to the Buyer, without further consideration, all such further
assignments, conveyances, endorsements, deeds, special powers of attorney,
consents and other documents, and take such other action, as the Buyer may
reasonably request in order to consummate the transactions contemplated by this
Agreement, including , without limitation, certificates of the Seller executed
by an officer of the Seller and dated as of various dates subsequent to the
Closing Date, certifying that each covenant and obligation of the Seller has
been complied with and each representation and warranty of the Seller is true
and correct at such Date as if made on and as of the Closing Date, and will be
true and correct as of each respective Termination Date.
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<PAGE> 8
4. CLOSING.
4.1 The Closing. The Closing of the purchase and sale of the
Purchased Assets (the "Closing") shall take place at the offices of Paul,
Hastings, Janofsky & Walker LLP, Costa Mesa, California at 5:00 p.m. (California
time) on July 16, 1999, or at such other place, date and time as the parties may
agree in writing (the "Closing Date").
4.2 Documents to be Delivered at the Closing. Concurrently with
the execution of this Agreement, each party shall execute and deliver to the
other the following documents (to the extent a party thereto).
(a) An executed Assignment Agreement relating to the
Domain Names in the form attached hereto as Exhibit B.
(b) An executed Bill of Sale relating to the office
furniture and equipment owned by the Seller, in the form attached hereto as
Exhibit C.
(c) An executed Employment Agreement by and between the
Buyer and Sanjay Sabnani, in the form attached hereto as Exhibit D.
(d) Executed Assignment and Assumption Agreement relating
to the Typhoon Equipment Leases in the form attached hereto as Exhibit E.
(e) An executed "Relinquishment of Fictitious Business
Name Statement," in the form specified by the applicable governmental agencies.
4.3 Documents to be Delivered Post Closing. As soon as
practicable after the Closing and acting in good faith with respect to the
post-closing covenants referenced herein, each party shall execute and deliver
to the other the following documents (to the extent a party thereto).
(a) An executed Assignment and Assumption of Lease and
Landlord Consent Agreement, in the form attached hereto as Exhibit A.
(b) Letters of termination relating to the Seller
Contracts, executed by the Seller, Sanjay Sabnani and the respective third
parties which acknowledge the termination of the Seller Contracts.
5. REPRESENTATIONS AND WARRANTIES OF SELLER. The Seller and the Members
jointly and severally represent and warrant to the Buyer the following:
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<PAGE> 9
5.1 Organization and Good Standing. The Seller is a limited
liability company duly organized, validly existing and in good standing under
the laws of the State of California and has all requisite power and authority to
enter into and to perform its obligations under this Agreement and the other
documents and agreements referenced or contemplated herein and to consummate the
transaction contemplated hereby. This Agreement and all other documents,
agreements and instruments referenced or contemplated herein to consummate the
transactions contemplated hereby are collectively referred to herein as the
"Transaction Documents."
5.2 Authorization. Execution, delivery and performance of the
Transaction Documents have been duly authorized.
5.3 Enforceability. Each of the Transaction Documents constitutes
a legal, valid and binding obligation of the Seller, and the Members, as the
case may be, enforceable against such applicable party in accordance with its
respective terms, except to the extent that enforceability may be limited by (a)
bankruptcy, insolvency, moratorium, fraudulent conveyance, reorganization or
other similar laws relating to the rights of creditors generally, (b)
limitations imposed by law or equitable principles upon the availability of
specific performance, injunctive relief or equitable remedies, and (c) concepts
of materiality.
5.4 No Conflict. The execution and the delivery of any of the
Transaction Documents will not:
(a) violate any term or provision of the Seller's Articles
of Organization or Operating Agreement;
(b) result in the creation of any lien or encumbrance upon
any of the Purchased Assets;
(c) result, to the Seller's knowledge, in a breach or
violation of, or be in conflict with, or constitute a default under, any
judgment, order, decree, statute, law, rule, regulation or other restriction of
any court, government or governmental agency applicable to the Seller or the
Purchased Assets; or
(d) result in a breach or violation of, or be in conflict
with, or constitute a default under the terms, conditions of any lease, license,
promissory note, conditional sales contract, commitment, indenture, mortgage,
deed of trust, partnership agreement or other agreement, contract, instrument or
arrangement to which the Seller is a party or any of the Purchased Assets is
bound.
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<PAGE> 10
5.5 Title to the Assets. The Seller has, and at the Closing the
Buyer shall have, sole, good and marketable title to the Purchased Assets, free
and clear of all liens, encumbrances or claims of any kind or nature whatsoever.
5.6 No Infringement. Except to the extent disclosed on Schedule
5.6 hereto, the Seller owns and has all the rights to use all intellectual
property currently being used in connection with the Business (the "Intellectual
Property"), and constituting part of the Purchased Assets. The Sellers have not
in the past infringed on any intellectual property rights belonging to any other
person or entity, and the use of the Intellectual Property does not presently
conflict with, infringe upon, or otherwise violate any rights held by others.
5.7 Actions and Proceedings. There are no actions, suits, or
proceedings pending or, to the knowledge of the Seller, threatened which,
individually or in the aggregate, would have a material adverse effect on the
Seller or the Purchased Assets or which would seek to question, delay or prevent
the consummation of, or materially impair the ability of the Seller to
consummate the transactions contemplated hereby.
5.8 Consents. Except as specifically provided in this Agreement
and to the Seller's knowledge, there are no authorizations, approvals, consents,
orders or waivers required to be obtained from, or notices or filings required
to be given to, or made with, any government, governmental agency or any person
(whether or not governmental in character) in connection with (a) the execution
and delivery of this Agreement and the other documents and agreements referenced
or contemplated herein; (b) the consummation of the transactions contemplated
hereby; and (c) the fulfillment of or the compliance with the terms, conditions
and provisions hereof.
5.9 Contracts. True and complete copies of all Seller Contracts
have been made available to the Buyer prior to the execution hereof. As of the
date hereof, except as otherwise provided in this Agreement:
(a) there exist no circumstance, to the Seller's
knowledge, which would affect the validity or enforceability of any of the
Seller Contracts in accordance with their respective terms;
(b) the Seller has performed and complied in all material
respects with all obligations required to be performed by it to date under, and
is not in default (without giving effect to any required notice or grace period)
under, or in breach of the terms, conditions or provisions of any of the Seller
Contracts; and
(c) the legal validity and enforceability of any of the
Seller Contracts has not been, and shall not in any manner be, impaired by the
consummation of
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<PAGE> 11
the transactions contemplated hereby. There is no warranty with respect to the
performance of any of the Seller Contracts.
5.10 Accuracy of Documents and Information. The copies of all
instruments, agreements, other documents and written information delivered to
the Buyer or any of its representatives pursuant to this Agreement are complete
and correct in all material respects as of the date hereof. The representations
and warranties made by the Seller and the Members in this Agreement, or in other
written materials furnished to the Buyer hereunder or in connection with the
transactions contemplated hereby, taken as a whole, do not contain any untrue
statement of material fact and do not omit any material fact necessary to make
the statements or facts contained herein or therein not misleading.
5.11 Taxes. The Purchased Assets shall be free and clear of any
liens or encumbrances created by the Seller's failure to (a) file applicable
federal, state, county and local tax returns required to have been filed, and
(b) pay or caused to be paid all taxes required to be paid, with respect to the
Purchased Assets in those jurisdictions where the nature or use of the Purchased
Assets requires such filing and where the failure to do so would have a material
adverse affect on the Purchased Assets.
6. REPRESENTATIONS AND WARRANTIES OF BUYER.
The Buyer hereby represents and warrants to the Seller and the
Members that:
6.1 Organization and Good Standing. The Buyer is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Utah and has all requisite power and authority to enter into and to
perform its obligations under the Transaction Documents.
6.2 Authorization. Execution, delivery and performance of the
Transaction Documents have been duly authorized.
6.3 Enforceability. Each of the Transaction Documents constitutes
a legal, valid and binding obligation of the Buyer, enforceable against the
Buyer in accordance with its respective terms, except to the extent that
enforceability may be limited by (a) bankruptcy, insolvency, moratorium,
fraudulent conveyance, reorganization or other similar laws relating to the
rights of creditors generally, (b) limitations imposed by law or equitable
principles upon the availability of specific performance, injunctive relief or
equitable remedies, and (c) concepts of materiality.
6.4 No Conflict. The execution and the delivery of any of the
Transaction Documents will not:
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(a) violate any term or provision of the Buyer's Articles
of Incorporation or Bylaws;
(b) result, to the Buyer's knowledge, in a breach or
violation of, or be in conflict with, or constitute a default under, any
judgment, order, decree, statute, law, rule, regulation or other restriction of
any court, government or governmental agency applicable to the Buyer; or
6.5 Actions and Proceedings. There are no actions, suits, or
proceedings pending or, to the knowledge of the Buyer, threatened which,
individually or in the aggregate, would have a material adverse effect on the
Buyer or which would seek to question, delay or prevent the consummation of, or
materially impair the ability of the Buyer to consummate the transactions
contemplated hereby.
6.6 Accuracy of Documents and Information. The copies of all
instruments, agreements, other documents and written information delivered to
the Seller or any of its representatives pursuant to this Agreement are complete
and correct in all material respects as of the date hereof. The representations
and warranties made by the Buyer in this Agreement, or in other written
materials furnished to the Seller hereunder or in connection with the
transactions contemplated hereby, taken as a whole, do not contain any untrue
statement of material fact and do not omit any material fact necessary to make
the statements or facts contained herein or therein not misleading.
7. SURVIVAL OF REPRESENTATIONS AND WARRANTIES
7.1 Survival of Representations and Warranties. All
representations, warranties and covenants in this Agreement or any certificate
or other writing or instrument or agreement delivered pursuant hereto or in
connection herewith shall survive the Closing and shall remain in effect for a
period of one (1) year after the Closing Date.
7.2 Indemnification.
(a) Indemnification by the Buyer. The Buyer shall defend,
indemnify and hold the Seller and its respective members, officers, employees,
advisors, agents and other representatives (collectively the "Seller Group")
harmless from and against any and all claims, demands, causes of action, losses,
costs, liabilities and expenses (including, without limitation, costs and
expenses of litigation or compliance with enforcement actions, injunctive
relief, remedial actions required by any private party or Governmental Entity
having jurisdiction and, to the extent permitted by law, reasonable attorneys'
fees) (collectively referred to as "Indemnifiable Claims" or singularly as an
"Indemnifiable Claim") incurred or suffered by any member of the Seller Group
which are attributable, directly or indirectly, in whole or in part, to, but
only to the extent caused by (a) a breach or inaccuracy of any representation or
warranty of the
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Buyer contained in any of the Transaction Documents or (b) failure of the Buyer
to perform any covenant of the Buyer contained in any of the Transaction
Documents. At the Seller's request, the Buyer shall, at its expense, defend all
legal actions which may be brought against any member of the Seller Group on
account of any of the foregoing, but a member of the Seller Group may, at his,
her or its option and expense, participate in any defense through his, her or
its own attorney. If the Buyer does not undertake to diligently prosecute a
defense, the Seller Group may, at their option, do so and charge any judgment or
settlement and any expense thereof to the Buyer (including all expenses of the
defense), which shall reimburse the Seller Group promptly.
(b) Indemnification by the Seller and the Members. The
Seller and the Members, jointly and severally, shall defend, indemnify and hold
the Buyer and its shareholders, officers, directors, employees, advisors, agents
and other representatives (collectively the "Buyer Group") harmless from and
against all Indemnifiable Claims incurred or suffered by any member of the Buyer
Group, which are attributable in whole or in part to, but only to the extent
caused by, (a) a breach or inaccuracy of any representation or warranty of the
Seller or any Member contained in any of the Transaction Documents; (b) failure
of the Seller or any Member to perform any covenant of the Seller or any Member
contained in any of the Transaction Documents; (c) any claim against the Buyer
Group relating to any Assumed Liability which relates to a date, occurrence or
obligation prior to the effective date of such assignment and assumption; and
(d) any claim against the Buyer Group relating to the Business, including,
without limitation, any claim related to the Seller Contracts. At the Buyer's
request, the Seller and the Members shall, jointly and severally, at their
expense, defend all legal actions which may be brought against any member of the
Buyer Group on account of any of the foregoing, but the Buyer may, at its option
and expense, participate in any such defense through its own attorneys. If
neither the Seller nor its Members undertakes to diligently prosecute a defense,
the Buyer Group may, at its option, do so and charge any judgment or settlement
and any expense thereof to the Seller or any or all of the Members (including
all expenses of the defense) which shall reimburse the Buyer promptly.
8. COSTS.
8.1 Finder's or Broker's Fees. The Seller and the Members jointly
and severally represent to the Buyer that they have not made any arrangement or
had any dealings whereby the Seller or the Buyer could become subject,
absolutely or contingently, to a claim for any brokerage commission or finder's
fee. The Buyer represents to the Seller that the Buyer has not and will not pay
any brokerage commission or finder's fee in respect of the consideration to be
paid under this Agreement or any other agreement made in contemplation of this
Agreement, and the Buyer has not made any arrangement or had any dealings
whereby the Seller could become subject, absolutely or contingently, to a claim
for any brokerage commission or finder's fee. The Seller on the one hand, and
the Buyer, on the other hand, each agree to indemnify and hold
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<PAGE> 14
harmless the other against any and all claims, demands, losses, costs, expenses,
obligations, liabilities, damages, recoveries, and deficiencies, including
interest, penalties, and reasonable attorneys fees, incurred or suffered by
reason of any brokerage commission or finder's fee alleged to be payable because
of any act, omission or statement of the indemnifying party.
8.2 Expenses. Whether or not the transactions contemplated by
this Agreement are consummated, each party shall pay its own fees and expenses
incident to the negotiation, preparation, execution, delivery, and performance
hereof, including, without limitation, the fees and expenses of its respective
counsel, accountants and other experts.
9. MISCELLANEOUS.
9.1 Post-Closing Cooperation. To the extent that the consents and
waivers referred to in this Agreement are not obtained by the Seller and the
Members by the Closing, the Members shall continue to use all reasonable efforts
to:
(a) provide to the Buyer the benefits of any such lease,
contract, license, agreement, commitment, permit, approval, or other interest or
right, to the extent necessary for or beneficial to the transfer to the Buyer;
(b) cooperate in any reasonable and lawful arrangement designed
to provide such benefits to the Buyer; and
(c) enforce, at the request of the Buyer (and at the Seller's
expense), any rights of the Seller under any lease, contract, license,
agreement, commitment, permit, approval or other interest or right transferred
to the Buyer in connection with the Purchased Assets or Assumed Liabilities
against such other party or parties thereto (including the right to elect to
terminate without penalty such of the foregoing in accordance with the terms
thereof upon the advice of the Buyer).
9.2 Entire Agreement. This Agreement contains, and is intended
as, a complete statement of all of the terms and the arrangements between the
parties with respect to the matters provided for, supersedes any previous
agreements and understandings between the parties with respect to those matters,
and cannot be changed or terminated orally. Neither party makes, and each party
hereby expressly disclaims reliance upon, any representations or warranties with
respect to the contemplated transactions other than those set forth herein.
9.3 Governing Law. This Agreement shall be governed by and
construed in accordance with the law of the State of California applicable to
agreements
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made and to be performed in California, without regard to the conflict of law
principles thereof.
9.4 Headings. The section headings contained in this Agreement
are solely for the purpose of reference, are not part of the agreement of the
parties and shall not in any way affect the meaning or interpretation of this
Agreement. All references in this Agreement to Sections, Schedules and Exhibits
are to sections, schedules and exhibits in this Agreement, unless otherwise
indicated.
9.5 Notices. All notices, requests, demands and other
communications hereunder shall be in writing and shall be given by hand
delivery, facsimile, telecopy, overnight courier service, or by United States
certified or registered mail, return receipt requested, to the addresses and
numbers set forth below. Each such notice, request, demand or other
communication shall be effective (a) if delivered by hand or by overnight
courier service, when delivered at the address specified in this Section; (b) if
given by facsimile or telecopy, when such facsimile or telecopy is transmitted
to the facsimile or telecopy number specified in this Section and confirmation
is received; and (c) if given by certified or registered mail, five days after
the mailing thereof.
If to the Seller or to any Member, to:
Typhoon Capital Consultants, L.L.C.
3420 Ocean Park Boulevard, Suite 3020
Santa Monica, California 90405
Attention: Sanjay Sabnani
Facsimile: (310) 399-3431
If to Buyer, to:
Inland Entertainment Corporation.
16868 Via Del Campo Court, #200
San Diego, California 92127
Attention: Christopher Wm. Voisin,
General Counsel and Secretary
Facsimile: (619) 716-2101
Any party may change its address for notice purposes by complying with
the procedures set forth in this Section 9.5.
9.6 Waiver; Amendment. Any waiver of any term or condition of
this Agreement, or any amendment or supplementation of this Agreement, shall be
effective only if in writing and signed by both parties. A waiver of any breach
or failure to enforce any of the terms or conditions of this Agreement shall not
in any way affect, limit or
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<PAGE> 16
waive a party's rights hereunder at any time to enforce strict compliance
thereafter with every term or condition of this Agreement.
9.7 Severability. If any one or more of the provisions of this
Agreement shall be found by a court of competent jurisdiction to be unreasonably
restrictive, under the circumstances, then such provision or provisions shall be
modified by such court so as to apply the same to the maximum extent allowed by
law and any such modification shall not affect the validity of any other
provision contained in this Agreement.
9.8 Binding Effect; Assignment. This Agreement shall be binding
upon and inure to the benefit of the parties and their respective successors and
permitted assigns. Nothing in this Agreement shall create or be deemed to create
any third party beneficiary rights in any person or entity not party to this
Agreement. No assignment of this Agreement or of any rights or obligations
hereunder may be made by either party (by operation of law or otherwise) without
the prior written consent of the other and any attempted assignment without the
required consent shall be void.
9.9 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
[Signature Page Follows]
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IN WITNESS WHEREOF, the parties hereto have executed this
instrument as of the date and year first above written.
BUYER:
INLAND ENTERTAINMENT
CORPORATION
By: /s/ L. DONALD SPEER, II
---------------------------------------------
L. Donald Speer, II
Chairman of the Board and Chief Executive
Officer
SELLER:
TYPHOON CAPITAL CONSULTANTS:
By: /s/ SANJAY SABNANI
---------------------------------------------
Sanjay Sabnani
President
MEMBERS:
/s/ SANJAY SABNANI
---------------------------------------------
Sanjay Sabnani
/s/ MANISHA SABNANI
---------------------------------------------
Manisha Sabnani
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<PAGE> 1
Exhibit 10.8
EMPLOYMENT AGREEMENT
This Agreement is made and entered into as of July 16, 1999, by and
between Inland Entertainment Corporation, a Utah corporation (the "Company") and
Sanjay Sabnani, an individual (the "Employee").
RECITALS
A. The Employee, prior to the date hereof, has been the President and
a significant member of Typhoon Capital Consultants, LLC, a California Limited
Liability Company doing business as venture-catalyst.com ("Typhoon Capital").
B. Pursuant to the Asset Purchase Agreement by and among the Company,
Typhoon Capital and the Employee and dated of even date herewith and the
agreements related thereto (collectively, the "Asset Purchase Agreement"), the
Company has acquired certain of the assets of Typhoon Capital.
C. The Company desires to employ the Employee upon the terms and
conditions set forth in this Agreement.
D. The Employee is willing to enter into this Agreement with respect
to the Employee's employment and services upon the terms and conditions set
forth in this Agreement.
AGREEMENT
In consideration of the provisions set forth in this Agreement, the
parties agree as follows:
1. Employment; Duties and Obligations
1.1 Employment. The Company hereby employs the Employee in the
capacity of Vice President, Investor Relations Officer of the Company and
President of a newly-formed, non-incorporated division of the Company referred
to as the Internet Consulting Division (the "IC Division") each for the term of
this Agreement, and the
<PAGE> 2
Employee hereby accepts such employment upon the terms and conditions
hereinafter set forth.
1.2 Service to the Company. The Employee shall have primary
responsibility for, among other things, managing and directing the day-to-day
(a) investor relations activities of the Company and (b) business of the IC
Division, in each case subject to applicable law and the policies of the
Company's Board of Directors.
1.3 Devotion of Time to the Business. Except with respect to the
activities contemplated in the Asset Purchase Agreement relating to the winding
up of the business affairs of Typhoon Capital, the Employee shall devote his
entire professional time and best efforts to the business of the Company and its
subsidiaries, and shall not during the term of this Agreement engage, directly
or indirectly, in any other business activities. This Agreement shall not be
interpreted to prohibit the Employee from making passive personal investments or
conducting private business affairs if those activities do not, in the sole
judgment of the Company, materially interfere with, or may be deemed to be in
conflict with, the services required under this Agreement. The Employee shall
not, directly or indirectly, acquire, hold, or retain any interest in any
business (a) competing with or similar in nature to the business of the Company
or any of its subsidiaries or affiliates or (b) for which the Company performs
services or otherwise has an interest.
2. Term. The term of this Agreement shall commence as of July 16, 1999
and shall continue in effect until July 16, 2000 (the "Term"). In the event that
the Company shall provide written notice of termination to the Employee prior to
the end of the Term, the Employee will be entitled to the severance benefits set
forth in Section 4.3 herein. In the event that the Employee shall, prior to the
end of the Term, provide written notice of termination to the Company pursuant
to Section 4.4, the Employee shall be entitled to the severance benefits set
forth in Section 4.4 herein. Upon the payment of such severance benefits under
Sections 4.3 or 4.4 herein, the Company and Employee shall be relieved from any
liability for the expired term of this Agreement.
3. Compensation
3.1 Base Salary. For all services rendered by the Employee under
this Agreement, the Company (or its designee) shall pay the Employee an annual
base salary related to the fiscal year of the Company (the "Base Salary"),
payable in accordance with the regular payroll practices of the Company (but at
least once a month), at a rate determined in accordance with this Agreement.
3.1.1 Initial Base Salary. The initial Base Salary to be paid
hereunder is $180,000 per annum or $15,000 per month, in all cases prorated
downward for services rendered for a period of less than a calendar month.
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<PAGE> 3
3.1.2 Adjustments to Base Salary. The Compensation Committee of
the Board (or in the absence of a compensation committee, the Board committee
performing equivalent functions or the entire Board of Directors of the Company)
may review the Base Salary of the Employee and determine whether to adjust it;
provided however that the Base Salary for any fiscal year shall not be less than
the initial Base Salary to be paid to the Employee hereunder.
3.2 Performance Bonus. The Compensation Committee (or in the absence
of a compensation committee, the Board committee performing equivalent functions
or the entire Board of Directors of the Company) may evaluate the Employee's
performance at the end of each fiscal year commencing with the Company's fiscal
year ending June 30, 2000, or at such other time(s) as such committee (or the
Board, as the case may be) shall deem it to be appropriate, and determine
whether the Employee's performance merits payment of a performance bonus to the
Employee. The performance bonus is wholly discretionary.
3.3 Long-Term Incentive Compensation. The Employee shall be eligible
to participate in all of the Company's long-term incentive compensation plans,
including, but not limited to, any Company stock option, restricted stock or SAR
plan (with the exception of those plans only applicable to non-employee
directors). As an inducement essential to the Employee entering into this
Agreement, the Compensation Committee of the Board has (a) granted on July 16,
1999 a nonstatutory stock option to purchase 262,500 shares of the Company's
common stock, $.001 par value per share ("Common Stock"), at an exercise price
per share equal to the fair market value on the date of grant and (b) agreed to
grant in the future a nonstatutory stock option to purchase 240,000 shares of
Common Stock, at an exercise price of $10.00 per share on the date that the fair
market value (as defined in the Company's 1995 Stock Option Plan, as amended) of
a share of Common Stock is $10.00, provided, however, that to be granted such
option the Employee must be an employee of the Company or one of its
subsidiaries on such date of grant, in each case pursuant to the terms
established by the Compensation Committee.
3.4 Other Benefits. The Employee shall be eligible to participate
in, and be covered by, all such other employee benefits generally provided to an
executive officer of the Company. Such benefits include but are not limited to,
health (including coverage for family members subject to plan limitations), life
and disability insurance, vacation and sick leave.
3.5 No Prohibition as to Other Compensation. Nothing herein shall be
deemed to preclude the Company, or any of the Company's subsidiaries, from
awarding additional compensation or benefits to the Employee during the term of
this Agreement, upon approval of the Compensation Committee (or in the absence
of a compensation
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<PAGE> 4
committee, the Board committee performing equivalent functions or the entire
Board of Directors of the Company), whether in the form of raises, bonuses,
additional fringe benefits or otherwise.
3.6 Expenses. The Company, in accordance with its policy (which may
be modified from time to time) shall promptly reimburse the Employee for all
expenses incurred by the Employee in relation to the business, including,
without limitation, expenses pertaining to travel, lodging, meals,
entertainment, seminars and periodicals. The Employee shall provide the Company
or the applicable subsidiary of the Company, as the case may be, with reasonable
documentation showing the business purpose and cost of each item of expense
submitted for reimbursement.
3.7 Tax Withholding. The Company and, to the extent applicable, any
other subsidiary of the Company, shall have the right to deduct and withhold
from the compensation payable to the Employee hereunder such amounts as may be
necessary to satisfy such corporation's obligations to federal, state and local
authorities to withhold taxes from compensation otherwise payable to the
Employee.
4. Termination
4.1 Termination for Cause. The Company may terminate this Agreement
and discharge the Employee for cause at any time following any applicable cure
period (if any is specifically designated in this Section 4.1) upon written
notice specifying the reasons for such termination. For purposes of this
Agreement, "cause" shall mean (a) the failure to follow the reasonable
instructions of the Board of Directors of the Company or the Executive Committee
of the Board of Directors, and, if a breach should occur, failure to cure such
breach within thirty (30) days after written notice thereof from the Company, as
the case may be, (b) the material breach of any term of this Agreement or the
Asset Purchase Agreement and failure to cure such breach within thirty (30) days
after written notice thereof from the Company, as the case may be, or (c) the
misappropriation of assets of the Company or any subsidiary of the Company by
the Employee resulting in a material loss to such entity. The Employee shall not
be entitled to receive any further payments or other benefits under this
Agreement after the expiration of 30 days from the date of such notice, other
than benefits which have previously vested in the Employee. The exercise of the
right of the Company to terminate the employment of the Employee pursuant to
this Section 4.1 shall not abrogate the rights and remedies of the terminating
party in respect of the breach or misappropriation giving rise to such
termination.
4.2 Termination Upon Death. This Agreement shall automatically
terminate upon the death of the Employee, and the Employee shall not be entitled
to receive any further payments or benefits under this Agreement, except that
the Company
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<PAGE> 5
and/or its subsidiaries, as the case may be, shall pay to the Employee's legal
representative the full salary for the month in which he dies and such legal
representative shall be entitled to receive those benefits which have previously
vested in the Employee.
4.3 Termination by the Company Without Cause. In the event the
Company shall terminate the Employee without cause during the Term, the
Employee's term of employment shall terminate on the close of business on the
day such notice is given (the "Termination Date"). In the event of such
termination, the Company shall (a) pay to the Employee within 180 days of such
termination, an aggregate amount of $200,000 in cash as a severance benefit (b)
transfer or assign, in each case with the appropriate release of liability
agreements, to the Employee such furniture and office equipment listed on
Exhibit A to the Asset Purchase Agreement without any further consideration from
the Employee (c) to the extent that the Company is the lessee or Sublessee under
the 3420 Lease (hereinafter defined), upon execution by Spieker Properties,
L.P., a California Limited Partnership (or its successor-in-interest) and the
Employee of an Assignment and Assumption of Lease and Release of Liability
Agreement in form and substance acceptable to the Company, assign to the
Employee that certain Lease dated March 22, 1999 of certain premises described
in said Lease and otherwise known as 3420 Ocean Park Boulevard, Suite 3020,
Santa Monica, California 90405 (the "3420 Lease"), (d) for a maximum period of
six (6) months commencing with the first complete month after the Employee's
termination date pay to the Employee as an additional severance benefit, 10% of
the monthly net revenues received by the Company and solely attributable to
services rendered during such six months on internet consulting accounts
originated by the IC Division and which the Employee and the Company agreed in
writing at the time of origination that should be included in accounts upon
which this portion of the severance benefit be based (the "Designated IC
Accounts"), such amounts to be payable to the Employee within 15 days after the
end of the month in which the Company received the payment, and (e) consistent
with applicable securities laws and with the approval of the applicable issuer
whose consent shall not be unreasonably withheld, transfer to the Employee
without further consideration to the Employee, 10% of any equity securities
(including transferable vested options or warrants), paid to the Company or the
IC Division with respect to any Designated IC Accounts.
4.4 Termination By the Employee. Notwithstanding anything to the
contrary herein, this Agreement may be terminated by the Employee upon 60 days
prior written notice. In the event that the Employee elects to terminate on or
before the expiration of the Term (which would require written notice no later
than May 17, 2000), the Company shall (a) transfer to the Employee such
furniture and office equipment listed on Exhibit A to the Asset Purchase
Agreement without any further consideration from the Employee (b) to the extent
that the Company is the lessee or sublessee under the 3420 Lease, upon execution
by Spieker Properties, L.P., a California Limited Partnership (or its
successor-in-interest) and the Employee of an Assignment and Assumption of Lease
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<PAGE> 6
and Release of Liability Agreement in form and substance acceptable to the
Company, assign to the Employee the 3420 Lease, (c) for a maximum period of six
(6) months commencing with the first complete month after the Employee's
termination date pay to the Employee as a severance benefit, 10% of the monthly
net revenues received by the Company and solely attributable to services
rendered during such six months on the Designated IC Accounts, such amounts to
be payable to the Employee within 15 days after the end of the month in which
the Company received the payment, and (d) consistent with applicable securities
laws and with the approval of the applicable issuer whose consent shall not be
unreasonably withheld, transfer to the Employee without further consideration to
the Employee, 10% of any equity securities (including transferable vested
options or warrants), paid to the Company or the IC Division with respect to any
Designated IC Accounts.
5. Resignation as Director and Officer. In the event of any termination
or resignation pursuant to Sections 4.1, 4.3 or 4.4, the Employee shall be
deemed to have resigned voluntarily as an officer and director of the Company
(and of any subsidiaries of the Company) if he was serving in any of such
capacities at the time of termination.
6. Inventions and Improvements.
(a) The Employee hereby assigns to the Company (or, at the
discretion of the Company, any of its subsidiaries that it designates) an
exclusive right to all inventions, discoveries, domain names, ideas and
improvements made by him, whether alone or jointly with others, relevant to the
subject matter of his employment, prior to the date of his employment hereunder.
(b) In carrying out research, developmental and productive
activities for the Company and its subsidiaries, the Employee shall accurately
record the precise nature thereof and the data derived therefrom, and all such
data and records shall be and remain the sole and exclusive property of the
Company and its subsidiaries.
(c) The Employee hereby recognizes as the exclusive property of the
Company (and, as appropriate, its subsidiaries) and hereby assigns to the
Company (and, as appropriate, its subsidiaries) without further consideration:
(i) all inventions, discoveries, domain names, ideas, copyright
rights, maskworks, improvements and any other intellectual property made,
conceived or discovered, by the Employee during the term of this Agreement,
whether by himself or jointly with others (whether or not employees of the
Company or its subsidiaries) and whether or not made at the Company's premises
or during working hours, relating or pertaining in any way to the kind of
business or any tests, research or development carried on by the Company, or any
subsidiary or affiliate of the Company; and
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<PAGE> 7
(ii) all of his right, title and interest in and to each
application for Letters Patent of the United States or of any foreign country
that he either alone or jointly with others (whether or not employees of the
Company or its subsidiaries), may hereafter file with respect to any such
invention, discovery, domain names, idea or improvement and each patent that may
be issued thereon.
(d) The Employee agrees to execute any assignments to the Company or
its nominee of his rights, title and interest in any such inventions,
discoveries, ideas, domain names, copyright rights, maskworks, improvements, and
any other intellectual property, and any other instruments and documents
requisite or desirable in applying for and obtaining patents, trademarks or
copyrights, at the cost of the Company with respect thereto in the United States
and all foreign countries as and when requested by the Company. The Employee
further agrees, whether in the employ of the Company (or its subsidiaries) or
not, to cooperate to the extent and in the manner requested by the Company in
the prosecution or defense of any patent claims or any litigation or other
proceedings involving any inventions, discoveries or improvements covered by
this Agreement, but all expenses thereof shall be paid by the Company or one of
its subsidiaries. Any invention, discovery, domain names, idea or improvement
within the scope of this Section 6 shall be disclosed promptly in writing to the
Board of Directors of the Company.
(e) In the event the Company is unable to secure the Employee's
signature on any document or documents needed to apply for or prosecute any
patent, copyright or other right or protection relating to an invention,
discovery, idea, domain name, or improvement, whether because of his physical or
mental incapacity or for any other reason whatsoever, the Employee hereby
irrevocably designates and appoints the Company and its duly authorized officers
and agents as his agent and attorney-in-fact, to act for and in his behalf and
stead to execute and file any such application or applications and to do all
other lawfully permitted acts to further the prosecution and issuance of
patents, copyrights, or similar protections thereon with the same legal force
and effect as if executed by him.
7. No Conflict With Other Employment Agreements. The Employee represents
and warrants that there are no other agreements or duties on the Employee's part
now in existence to assign inventions, discoveries, domain names, ideas, or
improvements to any party other than the Company or one of its subsidiaries. The
Employee will not disclose to the Company or one of its subsidiaries or induce
the Company or one of its subsidiaries to use any confidential information or
material that he is now or shall become aware of that belongs to a former
employer (other than Typhoon Capital) or any party other than the Company or one
of its subsidiaries.
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<PAGE> 8
8. Confidential Information; Covenant Not to Hire Employees. The
Employee acknowledges that in the course of his employment hereunder he will
have access and be made privy to the marketing, business and financial plans and
trade secrets of the Company and the Company's subsidiaries and affiliates (for
purposes of Sections 8 and Section 10 herein, collectively and, as the case may
be, each such subsidiary or affiliate individually, referred to as the
"Company") and will have access to information of the Company important to its
operations. The Employee recognizes that it is vital to the Company's business
that such plans and secrets not be disclosed to or used by others, and that the
Company's relations with its employees not be disrupted. The Employee hereto
covenants and agrees to execute, contemporaneously herewith, a Confidentiality
and Non-Disclosure Agreement substantially in the form attached hereto as
Exhibit A. The Employee shall not at any time during the term of this Agreement
and for a period of one year after such termination (a) employ any individual
who was employed by the Company or any of its affiliates, during the one (1)
year period commencing one (1) year prior to the date Employee's employment
terminates, or (b) in any way, cause, influence, or participate in the
employment of any such individual by anyone else during said period; provided,
however, that this covenant not to hire set forth in this sentence shall not
apply to the following employees: Evan Anderson, David Bronte, Jon Lake and
Donna Villegas.
9. Securities Trading Policy. The Employee hereto covenants and agrees
to execute, contemporaneously herewith, a copy of the Policy on Trading in
Company Securities by Company Personnel attached hereto as Exhibit B.
10. Injunctive Relief. If there is a breach or threatened breach of the
provisions of Sections 8 or 9 of this Agreement, the Company shall be entitled
to an injunction restraining the Employee from such breach. Nothing herein shall
be construed as prohibiting the Company from pursuing any other remedies for
such breach of threatened breach.
11. Authority. The Company represents and warrants to the Employee that
the performance of this Agreement and consummation of the transactions
contemplated hereby have been duly authorized by all requisite action and that
the individual executing this Agreement on behalf of the Company has the power
and authority to execute this Agreement.
12. Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be given by hand delivery, facsimile,
telecopy, overnight courier service, or by United States certified or registered
mail, return receipt requested. Each such notice, request, demand or other
communication shall be effective (a) if delivered by hand or by overnight
courier service, when delivered at the address specified in this Section; (b) if
given by facsimile or telecopy, when such facsimile or
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telecopy is transmitted to the facsimile or telecopy number specified in this
Section and confirmation is received; and (c) if given by certified or
registered mail, five days after the mailing thereof.
Address for notices (unless and until written notice is given of
any other address):
If to the Company:
Inland Entertainment Corporation.
16868 Via Del Campo Court, #200
San Diego, California 92127
Attention: Christopher Wm. Voisin,
General Counsel and Secretary
Fax: (619) 716-2101
If to the Employee:
Mr. Sanjay Sabnani
3420 Ocean Park Boulevard, Suite 3020
Santa Monica, California 90405
Fax: (310) 399-3431
13. Further Documents and Acts. Each of the parties hereto agrees to
cooperate in good faith with the other and to execute and deliver such further
instruments and perform such other acts as may be reasonably necessary or
appropriate to consummate and carry into effect the transactions contemplated
under this Agreement.
14. Financial Reporting. Any computation pertaining to the Company's
financial affairs to be made hereunder or referenced herein shall be based on
generally accepted accounting principles, applied on a consistent basis.
15. Attorneys' Fees. In any action, litigation or proceeding between the
parties arising out of or in relation to this Agreement, the prevailing party in
such action shall be awarded, in addition to any damages, injunctions or other
relief, and without regard to whether or not such matter be prosecuted to final
judgment, such party's costs and expenses, including reasonable attorneys' fees.
16. Governing Law. This Agreement will be governed by and construed in
accordance with the laws of the State of California without regard to the
conflicts of law principles thereof.
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17. Venue. The parties hereby irrevocably and unconditionally consent to
submit to the exclusive jurisdiction of the courts of the State of California,
County of San Diego, and/or the United States District Court for the Southern
District of California for any actions, suits, controversies or proceedings
arising out of or relating to this Agreement and the transactions contemplated
hereby (and the parties agree not to commence any action, suit or proceeding
relating thereto except in such courts), and further agree that service of any
process, summons, notice or document by U.S. registered mail to the respective
addresses set forth above shall be effective service of process for any action,
suit or proceeding brought against the parties in any such court. The parties
hereby irrevocably and unconditionally waive any objection to the laying of
venue of any action, suit, controversies or proceeding arising out of this
agreement or the transactions contemplated hereby, in the courts of the State of
California, County of San Diego and/or the United States District Court for the
Southern District of California, and hereby further irrevocably and
unconditionally waive and agree not to plead or claim in any such court that any
such action, suit or proceeding brought in any such court has been brought in an
inconvenient or improper forum.
18. Amendments/Waiver. This Agreement may be amended, supplemented,
modified and/or rescinded only through an express written instrument signed by
all the parties or their respective successors and assigns. Any party may
specifically and expressly waive in writing any portion of this Agreement or any
breach hereof, but no such waiver shall constitute a further or continuing
waiver of any preceding or 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.
19. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
20. Severability. In the event that any one or more of the provisions
contained herein, 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.
21. Entire Agreement. This Agreement contains the entire and complete
understanding between 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
superseded hereby.
-10-
<PAGE> 11
22. Remedies. All rights, remedies, undertakings, obligations, options,
covenants, conditions and agreements contained in this Agreement shall be
cumulative and no one of them shall be exclusive of any other.
23. Successors. This Agreement shall be binding upon and inure to the
benefit of the parties and their respective heirs, legatees, legal
representatives, personal representatives, successors and assigns.
24. Interpretation. The language in all parts of this Agreement shall be
in all cases construed simply according to its fair meaning and not strictly for
or against any party. Whenever the context requires, all words used in the
singular will be construed to have been used in the plural, and vice versa, and
each gender will include any other gender. The captions of the Sections of this
Agreement are for convenience only and shall not affect the construction or
interpretation of any of the provision herein.
25. Miscellaneous. Each provision of this Agreement to be performed by a
party hereto shall be deemed both a covenant and condition, and shall be a
material consideration for the other party's performance hereunder, and any
breach thereof by the party shall be deemed a material default hereunder. The
recitals and all other documents referenced in this Agreement are fully
incorporated into this Agreement by reference. Unless expressly set forth
otherwise, all references herein to a "day" shall be deemed to be a reference to
a calendar day. Unless expressly stated otherwise, cross-references herein shall
refer to provisions within this Agreement, and shall not be deemed to be
references to the overall transaction or to any other document. Time is of the
essence in the performance of this Agreement.
EMPLOYEE ACKNOWLEDGES THAT HE HAS READ THIS AGREEMENT AND UNDERSTANDS
ITS CONTENTS. EMPLOYEE ALSO ACKNOWLEDGES THAT THE COMPANY HAS INFORMED HIM THAT
THIS AGREEMENT DOES NOT REQUIRE EMPLOYEE TO ASSIGN TO THE COMPANY ANY INVENTION
WHICH QUALIFIES FULLY UNDER THE PROVISIONS OF SECTION 2870 OF THE CALIFORNIA
LABOR CODE, A COPY OF WHICH IS ATTACHED AS EXHIBIT C TO THIS AGREEMENT. BY
SIGNING THIS AGREEMENT, EMPLOYEE AGREES TO BE BOUND BY ALL OF THE TERMS AND
CONDITIONS OF THIS AGREEMENT.
(Signature page follows)
-11-
<PAGE> 12
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
COMPANY: INLAND ENTERTAINMENT CORPORATION,
a Utah corporation
By: /s/ L. DONALD SPEER, II
-----------------------------------------
L. Donald Speer, II
Chairman of the Board, Chief
Executive Officer and President
EMPLOYEE: /s/ SANJAY SABNANI
-----------------------------------------
Sanjay Sabnani
-12-
<PAGE> 13
EXHIBIT A
CONFIDENTIALITY AND NON-DISCLOSURE AGREEMENT
<PAGE> 14
EMPLOYEE AGREEMENT REGARDING CONFIDENTIALITY
AND NON-DISCLOSURE
In return for new or continued employment by INLAND ENTERTAINMENT
CORPORATION (the "Company"), I acknowledge and agree that:
1. DEFINITION. For purposes of this Agreement, unless otherwise noted,
all references to the "Company" shall include the Company and/or all of its
direct and indirect subsidiaries.
2. OBLIGATIONS OF CONFIDENTIALITY. I will maintain in confidence and
will not, either during or at any time after the term of my employment without
the prior express written consent of the Company, communicate or disclose to, or
use for the benefit of myself or any other person, firm, association or
corporation (including, without limitation, any subsequent employer) any
proprietary or confidential information, trade secret or know-how belonging to
the Company ("Proprietary Information"), whether or not it is in written or
permanent form, except to the extent required to perform duties on behalf of the
Company in my capacity as an employee. Such Proprietary Information includes,
but is not limited to, techniques, processes, plans or methods of the Company in
developing, marketing and licensing products and services, and technical and
business information relating to the Company's inventions or products, research
and development, production processes, manufacturing and engineering processes,
machines and equipment, finances, existing and potential customers and
suppliers, marketing and future business plans. However, such Proprietary
Information shall not include any materials, techniques, or information of the
type specified to the extent that such materials, techniques or information are
publicly known or generally utilized by others engaged in the same business or
activities as that in the course of which the Company utilized, developed or
otherwise acquired such materials, techniques, or information. Upon termination
of my employment or at the request of my supervisor before termination, I will
deliver to the Company all written and tangible material in my possession
belonging to the Company incorporating the Proprietary Information or otherwise
relating to the Company's Business. These obligations with respect to
Proprietary Information extend to information belonging to customers and
suppliers of the Company who may have disclosed such information to me as the
result of my status as an employee of the Company. The covenants made in this
Section 2 shall commence on the date hereof and shall be perpetual with respect
to any Proprietary Information. Notwithstanding anything to the contrary herein,
in response to a valid court order or other governmental body (including any
administrative body or legislative body, including a committee thereof, with
jurisdiction to order the Company to divulge, disclose or make accessible such
information), the Employee may divulge Proprietary Information; provided
however, that
<PAGE> 15
the Employee shall immediately notify the Company of his receipt of any subpoena
or other notice to testify (orally or in writing) or appear and/or produce
documents to enable the Company to take action to prevent such Proprietary
Information from being made public or otherwise disclosed.
3. POSSESSION OF INFORMATION IN TANGIBLE FORM. All Proprietary
Information consisting of records, reports, notes, compilations, computer
software programs or disks or other recorded matter, and copies or reproductions
thereof, relating to the Company's operations, activities or business, made or
received by me during any period of employment with the Company are and shall be
the Company's exclusive property, and I will keep the same at all times in the
Company's custody and subject to its control, and will surrender the same at the
termination of my employment if not before.
4. COMPANY'S REMEDIES FOR BREACH. I acknowledge that a breach by me of
this Agreement cannot reasonably or adequately be compensated in damages in an
action at law, and that a breach of any of the provisions contained in this
Agreement will cause the Company irreparable injury and damage. By reason
thereof, I agree that the Company shall be entitled, in addition to any other
remedies it may have under this Agreement or otherwise, to preliminary and
permanent injunctive and other equitable relief to prevent or curtail any breach
of this Agreement; provided, however, that no specification in this Agreement of
a specific legal or equitable remedy shall be construed as a waiver or
prohibition against the pursuing of other legal or equitable remedies in the
event of such a breach.
5. SEVERABILITY. In the event that any provision of this Agreement or
any word, phrase, clause, sentence or other portion thereof should be held to be
unenforceable or invalid for any reason, such provision or portion thereof shall
be modified or deleted in such a manner so as to make this Agreement as modified
legal and enforceable to the fullest extent permitted under applicable laws.
6. BINDING EFFECT. This Agreement shall be binding upon my heirs,
executors, administrators or other legal representatives or assigns and shall
inure to the benefit of and be enforceable by the Company and its successors and
assigns.
7. GOVERNING LAW. This Agreement will be governed by and construed in
accordance with the laws of the State of California without regard to the
conflicts of law principles thereof.
8. VENUE. The parties hereby irrevocably and unconditionally consent to
submit to the exclusive jurisdiction of the courts of the State of California,
County of San Diego, and/or the United States District Court for the Southern
District of California for any actions, suits, controversies or proceedings
arising out of or relating to this
-2-
<PAGE> 16
Agreement and the transactions contemplated hereby (and the parties agree not to
commence any action, suit or proceeding relating thereto except in such courts),
and further agree that service of any process, summons, notice or document by
U.S. registered mail to the respective addresses set forth above shall be
effective service of process for any action, suit or proceeding brought against
the parties in any such court. The parties hereby irrevocably and
unconditionally waive any objection to the laying of venue of any action, suit,
controversies or proceeding arising out of this Agreement or the transactions
contemplated hereby, in the courts of the State of California, County of San
Diego and/or the United States District Court for the Southern District of
California, and hereby further irrevocably and unconditionally waive and agree
not to plead or claim in any such court that any such action, suit or proceeding
brought in any such court has been brought in an inconvenient or improper forum.
(signature page follows)
-3-
<PAGE> 17
IN WITNESS WHEREOF, I have hereunto set my hand as of this 16th day of
July, 1999.
-------------------------------------
Sanjay Sabnani
Address:
3420 Ocean Park Boulevard, Suite 3020
Santa Monica, California 90405
Fax: (310) 399-3431
Accepted and agreed:
INLAND ENTERTAINMENT CORPORATION,
a Utah corporation
- -------------------------------------
L. Donald Speer, II
Chairman of the Board, Chief Executive
Officer and President
-4-
<PAGE> 18
EXHIBIT B
COMPANY POLICY ON TRADING IN COMPANY SECURITIES
BY COMPANY PERSONNEL
<PAGE> 19
SECURITIES TRADING
COMPANY POLICY
ON
TRADING IN COMPANY SECURITIES
BY
COMPANY PERSONNEL
<PAGE> 20
INTRODUCTION
PROHIBITION ON INSIDER TRADING; STATEMENT OF COMPANY POLICY - SECURITIES TRADES
BY COMPANY PERSONNEL
As you may be aware, due to the fact that Inland is a small, publicly
traded corporation and most of us are privy to very sensitive information
regarding the growth of the corporation and the development of various programs
and projects, it is imperative that each of us understand, appreciate and comply
with the limitations which are imposed upon us by law concerning the exercise of
stock options and the purchase and/or sale of Inland securities (stock).
As a general rule, employees with "material" information concerning the
corporation and its operations are prohibited from trading the corporations
stock until such time as the information becomes public. As set forth in the
attached policy statement, "material information" is any information that a
reasonable investor would consider important in a decision to buy, hold, or sell
stock. In short, any information which could reasonably affect the price of the
stock." This prohibition applies also to family, friends and to other third
parties to whom we might impart the information.
As the penalties are quite severe, I have attached a copy of the company
policy together with a compliance form that each employee must read and sign on
an annual basis. A signed copy of your compliance form will be maintained in
your employee file. If you have questions in regards to the policy, form or
compliance with the regulations prohibiting insider trading, please contact
Kevin McIntosh, or if not available either Andy Laub or me.
/s/ CHRISTOPER WM. VOISIN
----------------------------
Christopher Wm. Voisin
General Counsel
2
<PAGE> 21
INLAND ENTERTAINMENT CORPORATION
STATEMENT OF COMPANY POLICY
RE: SECURITIES TRADES BY COMPANY PERSONNEL
THE NEED FOR A POLICY STATEMENT
The Securities and Exchange Commission (the "SEC") and the U.S.
Attorneys have been vigorously pursuing violations of insider trading laws. To
date their efforts have concentrated on individuals directly involved in trading
abuses. In 1988, however, to further deter insider trading violations, Congress
expanded the authority of the SEC and the Justice Department, adopting the
Insider Trading and Securities Fraud Enforcement Act. In addition to increasing
the penalties for insider trading, the Act puts the onus on companies and
possible other "controlling persons" for violations by company personnel.
Although the Act was aimed primarily at the securities industry, lawyers
have recently begun to focus on the application of the new laws to companies in
other industries. The conclusion that many are now coming to is that if
companies like ours do not take active steps to adopt preventive policies and
procedures covering the securities trades by company personnel, the consequences
could be severe.
In addition to responding to the Act, we are adopting this Policy
Statement to avoid even the appearance of improper conduct on the part of anyone
employed by or associated with Inland Entertainment Corporation ("Inland" or the
"Company"), not just so-called insiders.
We have all worked hard over the years to establish our reputation for
integrity and ethical conduct. We cannot afford to have it damaged.
THE CONSEQUENCES
The consequences of insider trading violations can be staggering. For
individuals who trade on inside information (or tip information to others):
- A civil penalty of up to three times the profit gained or loss
avoided;
- A criminal fine (no matter how small the profit) of up to $1
million; and
- - A jail term of up to ten years.
For a company (as well as possibly any supervisory person) that fails to
take appropriate steps to prevent illegal trading:
- - A civil penalty of the greater of $1 million or three times the profit
gained or loss avoided as a result of the employee's violation; and
3
<PAGE> 22
- - A criminal penalty of up to $2.5 million.
Moreover, if an employee violates the Company's insider trading policy,
Company imposed sanctions, including dismissal for cause, could result for
failing to comply with the Company's policy or procedures. Needless to say, any
of the above consequences, even an SEC investigation that does not result in
prosecution, can tarnish one's reputation and irreparably damage a career.
OUR POLICY
To help avoid the above-referenced consequences to the Company and its
personnel, we have designed the following practices which all directors,
officers and employees of the Company are required to follow:
1. Material nonpublic information about the Company shall not be
revealed to any other person (even a family member), except when necessary in
the course of the business of Inland.
2. Securities of the Company shall not be purchased or sold when the
purchaser or seller knows of material nonpublic information.
Assuming that the purchaser or seller knows of no material nonpublic
information, (a) all directors, all executive officers and the controller of the
Company must contact and obtain clearance from the Chief Financial Officer with
notice to the company's General Counsel and SEC Coordinator, prior to engaging
in a purchase or sale of securities of the Company (see additional provision for
corporate directors & officers); (b) all other employees of the Company must
obtain clearance from the SEC Coordinator if any transaction in the Company's
securities involves (i) options (other than granted by the Company); (ii) the
purchase of securities on margin; (iii) short sales; or (iv) buying or selling
puts or calls.
Material nonpublic information about another public company (e.g.,
companies doing business with the Company) obtained in the course of employment
at the Company shall not be revealed to any other person (even a family member)
and securities of such public company shall not be purchased or sold when the
purchaser or seller knows of material nonpublic information. You must contact
the SEC Coordinator and General Counsel prior to any trade if you question
whether you are in possession of such nonpublic information.
The very same restrictions apply to your family members and others
living in your household. Directors, officers and employees are expected to be
responsible for the compliance of their family and personal household.
3. Annually, each director, officer and employee of the Company must
submit written confirmation that such person understands and agrees to follow
the policies and procedures set forth above.
4
<PAGE> 23
Transactions that may be necessary or justifiable for independent
reasons (such as the need to raise money for an emergency expenditure) are no
exception. As noted above, even the appearance of an improper transaction must
be avoided to preserve our reputation for adhering to the highest standards of
conduct.
MATERIAL INFORMATION
Material information is any information that a reasonable investor would
consider important in a decision to buy, hold or sell stock. In short, any
information that could reasonably affect the price of the stock.
TWENTY-TWENTY HINDSIGHT
Remember, if your securities transactions become the subject of
scrutiny, they will be viewed after-the-fact with the benefit of hindsight. As a
result, before engaging in any transaction you should carefully consider how
regulators and others might view your transaction in hindsight.
TIPPING INFORMATION TO OTHERS
Whether the information is proprietary information about the Company or
information that could have an impact on the Company's stock price, directors,
officers, and employees must not pass material information on to others. The
above penalties apply, whether or not you derive any benefit from another's
actions. In fact, in recent years the SEC imposed a $470,000 penalty on a tipper
even though he did not profit from his tippees' trading.
WHEN INFORMATION IS PUBLIC
As you can appreciate, it is also improper for a director, officer or
employee to enter a trade immediately after the Company has made a public
announcement of material information, including earnings releases. Because the
Company's shareholders and the investing public should be afforded the time to
receive the information and act upon it, as a general rule you should not engage
in any transactions until the third business day after the information has been
released. Thus, if an announcement is made on a Monday, Thursday generally would
be the first day on which you should trade. If an announcement is made on
Friday, Wednesday generally would be the first day.
COMPANY ASSISTANCE
Any person who has any questions about this Policy Statement may obtain
additional guidance from the SEC Coordinator or General Counsel. Remember,
however, the ultimate responsibility for adhering to the Policy Statement and
avoiding improper transactions rests with you. In this regard, it is imperative
that you use your best judgment.
5
<PAGE> 24
TRADING WINDOW FOR CORPORATE OFFICERS AND DIRECTORS
Because officers and directors have access to more information than
other employees, they have an "insiders" advantage in regards to making
decisions related to trading in shares of the company. Accordingly, officers and
directors should refrain from trading in Inland securities (this includes the
exercise of options), during certain times of the year. The trading "windows"
for officers and directors, (allowable times to trade in shares of the company),
are typically short in duration. The trading "window" is closed from the time
key employees in a corporation (directors and officers) have sufficient
information to make an estimate as to quarterly profitability and operational
success for a given fiscal quarter, until the 3rd day after the release of such
results. (Also see sections above for additional time periods trading windows
may be closed i.e. Material Information, etc.)
For Inland, knowledge of quarterly profitability, (start of trading
"blackout" period), is determined to be the 20th day of the 3rd month of the
quarter (i.e. March 20th, June 20th, September 20th, and December 20th). Release
of quarterly results, (end of "blackout" period the 3rd day after such release),
is no later than the filing of the quarterly 10-QSB normally released 40 to 45
days after the end of a given quarter, or the annual earnings report 10-KSB due
90 days subsequent to fiscal year end (June 30). An earnings press release is
often done one to two weeks before the filings of the 10-QSB or 10-KSB. If this
is the case, the trading window will open three business days subsequent to this
earlier earnings release.
Example 1: A director would like to exercise options in the quarter
ending December 31st. Once the prior quarter earning report (10-QSB) has been
released (which would be approximately November 14th) the director has to wait
until three (3) business days after the earnings release before trading. As such
the first available date would be November 17th (presuming the 17th is not a
Saturday or Sunday). At the same time, the 20th day of the third month of the
quarter ending on December 31st is December 20th. Consequently, the officer or
director has a trading "window" of November 18th through December 20th.
Example 2: A director would like to exercise options in the 1st Quarter
ending September 30th, however the prior quarter annual earnings report (10-KSB)
will not be released until approximately September 28th (i.e. 90 days after June
30th). September 20th started the blackout period for 2nd Quarter results.
Therefore, the blackout period for 4th quarter commencing June 20th overlaps
with the blackout period for 1st Quarter and therefore the trading window is not
open again until 3 days after 2nd Quarter results are released, which would be
approximately November 17th as noted in Example 1 above.
In all cases, officers and directors are required to contact the SEC
coordinator prior to executing a trade or exercising an option.
6
<PAGE> 25
STATEMENT OF COMPLIANCE REGARDING
COMPANY POLICY
CONCERNING SECURITIES TRADES
BY
COMPANY PERSONNEL
I, ____________________________________ hereby acknowledge and confirm
that I have read the attached STATEMENT OF COMPANY POLICY concerning securities
trades by company personnel, that I understand the legal requirements and
limitations concerning trading in company securities and agree to be bound at
all times by the company policy.
I further acknowledge and agree that I will at all times comply with the
company's policy concerning trading in company securities and will contact the
company's SEC Coordinator or their designee concerning any questions I might
have and prior to either selling or purchasing company securities.
------------------------------
Employee Signature Date
------------------------------
Print Name
7
<PAGE> 26
EXHIBIT C
SECTION 2870 OF THE CALIFORNIA LABOR CODE
<PAGE> 27
SECTION 2870 OF THE CALIFORNIA LABOR CODE
SECTION 2870. EMPLOYMENT AGREEMENTS; ASSIGNMENT OF RIGHTS
(a) Any provision in an employment agreement which provides that an
employee shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without using the employer's
equipment, supplies, facilities, or trade secret information except for those
inventions that either:
(1) Relate at the time of conception or reduction to practice of
the invention to the employer's business, or actual or demonstrably anticipated
research or development of the employer; or
(2) Result from any work performed by the employee for the
employer.
(b) To the extent a provision in an employment agreement purports to
require an employee to assign an invention otherwise excluded from being
required to be assigned under subdivision (a), the provision is against the
public policy of this state and is unenforceable.
<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 1999
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, 2000,
interest only on the unpaid principal balance; thereafter, commencing on
September 15, 2003, 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, 2003, 2004 and 2005, 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
1
<PAGE> 2
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 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
2
<PAGE> 3
the 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
consistent 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 for 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 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
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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
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<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, 1999
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, 2000,
interest only on the unpaid principal balance; thereafter, commencing on
September 15, 2003, 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 September 15, 2003, 2004, and 2005, 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
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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.
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(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. Limitations 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 if 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 on 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.
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<PAGE> 4
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
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<PAGE> 1
EXHIBIT-10.27
WORLDWIDE MEDIA HOLDINGS, N.V
&
INLAND ENTERTAINMENT CORPORATION
CONSULTING & MARKETING AGREEMENT
THIS AGREEMENT (the "Agreement") is entered into and effective as of the
12th day March, 1998 (the "Effective Date"), by and between Worldwide Media
Holdings, N.V., a Curacao, Netherlands Antilles corporation (hereinafter "WMH"),
with its registered offices at Kaya W.F.G. (Jombi) Mensing 36, Curacao,
Netherlands Antilles and Inland Entertainment Corporation, a Utah corporation
(hereinafter "IEC"), with its principal place of business located at 16868 Via
Del Campo Court, Suite #200, San Diego, CA 92127, USA.
RECITALS
WHEREAS, WMH is a corporation duly organized under the laws of the
Netherlands Antilles, with the power and authority to transact all lawful
business thereby;
WHEREAS, WMH is a wholly owned foreign subsidiary corporation of Inland
Entertainment Corporation;
WHEREAS, WMH provides consulting and marketing services to the Internet
gaming and entertainment industry;
WHEREAS, Bardenac Holding, N.V., (Bardenac), the owner of several virtual
(Internet) casinos, has appointed WMH its Marketing Representative to render
certain services related to its Internet gaming enterprise;
WHEREAS, pursuant to WMH's appointment as Marketing Representative to
Bardenac, WMH requires technical assistance, advice, training, marketing, and
consulting services in connection with both the services to be provided by WMH
under its marketing agreement with Bardenac as well as matters concerning the
general operation and business affairs of WMH in order to maximize WMH's
revenues and business opportunities;
WHEREAS, WMH has determined that IEC can provide the technical assistance,
advice, training, marketing and consulting services required by WMH, while not
assuming an active management role itself, and while acting solely as a
consultant and marketing agent to WMH;
WHEREAS, the parties acknowledge and agree that under this Agreement, that
except as a shareholder in WMH, IEC shall not manage, direct, control or have a
vote concerning any aspect of WMH's business, the management of which shall be
exercised exclusively by WMH.
NOW THEREFORE, in consideration of the mutual covenants contained herein,
the parties hereto agree as follows:
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I. ENGAGEMENT OF CONSULTANT AND SCOPE OF CONSULTING SERVICES.
A. Engagement of Consultant. WMH has and shall continue to have the sole
proprietary interest in and management responsibility for the conduct of WMH's
business including all Internet gaming activities related thereto. WMH is
seeking technical assistance and expertise in the operation of its marketing and
consulting activities and hereby retains and engages IEC to provide consulting
and marketing services to WMH, its management staff and employees.
B. Services To Be Provided By Consultant. The scope of services to be
provided by IEC may include consulting, marketing, operational, and accounting
services, technical assistance, training and advice to WMH and its employees and
staff concerning all matters relating to the operation and business activities
of WMH including but not limited to organization and administration, research
and development, planning and development, interactive gaming activities and Web
site development, product engineering, internal controls and accounting
procedures, and marketing, product distribution and advertising.
C. Expansion of Business Activities. In the event that WMH acts to expand
its business, or to add additional clients to its portfolio during the term of
this Agreement, IEC will provide the above-described consulting and marketing
services with respect to any such new or expanded activities and clients during
the term of this Agreement.
D. Cooperative Efforts. Both parties to this Agreement shall exercise
their best efforts to fully cooperate with each other in the performance of the
services to be rendered hereunder; provided, however, that it shall be within
the sole discretion of WMH to determine whether or not to act upon or implement
the technical assistance, marketing, distribution consultation or advice
provided by IEC.
E. Services Provided at Direction of WMH. The determination as to what
specific consulting, distribution and marketing services (identified in Exhibit
"A") shall be provided by IEC, and the format in which IEC's reports or
recommendations are to be provided shall be determined exclusively by WMH, and
the services provided hereunder shall be performed by IEC in accordance with and
under the direction of WMH.
1. IEC has provided WMH with a list of areas (Exhibit "A") in which
it is prepared to provide services. IEC will update this list as necessary
during the term of this Agreement.
2. WMH shall, from time to time and after consultation with IEC,
identify and issue consulting and marketing assignments for specific tasks to be
performed by IEC.
3. IEC will perform in accordance with the terms of this Agreement
in order to accomplish the consulting and marketing assignments issued by WMH.
IEC will report to WMH on all work performed under each consulting and marketing
assignment.
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4. Payment under this Agreement shall be conditioned upon compliance
by IEC with the terms and conditions of this Agreement. WMH's Executive
Committee shall review the work performed by IEC on a monthly basis, and the
decision to adopt, approve, ratify or implement any proposal, suggestion or
recommendation made by IEC shall rest exclusively with WMH, acting through its
Executive Committee.
II. NO MANAGEMENT SERVICES PROVIDED.
The parties expressly acknowledge that this is a consulting agreement and
that IEC shall not engage in any management activities or perform any management
services with respect to the affairs or activities or any future activities of
WMH unless expressly agreed to in writing.
III. MANAGEMENT OF COMPANY -- Representation in Management and Operation of
Company by Officers, Directors, or Employees of Consultant; Disclosure and
Waiver of Conflicts of Interest.
It is expressly acknowledged and agreed that as WMH is a wholly owned
foreign subsidiary of Inland Entertainment Corporation, any officer, director or
employee of IEC may serve on the Board of Directors and Executive Committee of
WMH or act in a management capacity as to the activities of WMH and its business
endeavors including the Enterprise. WMH hereby acknowledges and waives any
potential conflict of interest that may exist now or hereafter, provided that
any directors, officers or employees of IEC who serve as members of WMH's board
or in a management capacity recognize and observe the duty of loyalty and duty
of care commensurate with and attendant upon said individuals acting within
their fiduciary capacity and obligations to WMH.
IV. TERM OF AGREEMENT.
A. Term. This Agreement shall have a term which commences on the
Effective Date, and which continues for a period of sixty (60) months, unless
sooner terminated under Section IV.B or Section VIII; provided however, that the
Agreement may be extended by mutual agreement of the parties. For the purposes
of this Agreement, the parties agree that the accounting and calculation
contemplated hereunder shall commence with the first full calendar month
following the Effective Date of this Agreement.
B. Early Termination and Buy Out by Company. At any time after the second
full year of this Agreement, Either party in its sole discretion may serve
notice on the other party of its intention to terminate this Agreement without
cause under this Section IV.C. Such notice of early termination shall be
effective three (3) months after its receipt and this Agreement shall remain in
full force during that three (3) month notice period. After the three (3) month
notice period, the obligations under this Agreement shall terminate.
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<PAGE> 4
V. CONFIDENTIALITY.
The parties agree that they will not disclose the financial terms of this
Agreement to third parties unless such disclosure is required by the laws of the
United States of America, of any State as a member of the union of the United
States of America, the laws of the Netherlands Antilles, or the laws of any
foreign country having jurisdiction over the parties hereto; provided, however,
that nothing contained herein shall be deemed to prohibit IEC from making public
disclosures required by law as a publicly held corporation. The parties further
agree that neither will disclose to third parties business and financial
information of a confidential nature concerning the other party that it learns
in the course carrying out their respective duties under this Agreement,
including but not limited to, information concerning revenue, number of patrons,
number of attempted entries or "hits" on any Enterprise-related Web site or
game, financial plans, marketing information or any other information of a
proprietary or intellectual property nature including information related to
patents, trademarks and copyrights and their applications, or any information
commonly known or treated as "trade secrets". Upon written request of one party,
the requirements of this Section may be waived by the other party in writing,
such waiver to be conditioned on whatever terms are included in the written
waiver.
VI. COMPENSATION OF CONSULTANT.
In consideration of the satisfactory performance of the consulting and
marketing services described herein, IEC shall receive from WMH, on a monthly
basis during the term of this Agreement, compensation payable as follows:
A. Base Consulting & Marketing Fee. Once the cumulative net revenues of
WHM reach or exceed FIVE-HUNDRED THOUSAND ($500,000) DOLLARS, as calculated from
WMH's inception, IEC shall receive a Base Consulting & Marketing Fee
(hereinafter "Base Fee") of FIFTEEN-THOUSAND ($15,000.00) DOLLARS per each
calendar month thereafter. The Base Fee shall be paid to IEC by the twentieth
(20th) day of the following calendar month.
B. Additional Consulting & Marketing Fee. In addition to the Base Fee,
IEC shall be paid an Additional Consulting and Marketing Fee (hereinafter
"Additional Fee") for each calendar month in which the net revenues of WMH
exceed FIFTEEN-THOUSAND ($15,000) DOLLARS. The Additional Fee shall be equal to
.001% of combined gross handle of the virtual casino properties serviced by WMH.
For purposes of this Agreement, the term "handle" shall mean the money wagered
in a virtual casino without regard or consideration of the result of the play.
Any Additional Fee payable under this Agreement shall be paid to IEC by the
twentieth (20th) day of the following calendar month.
C. Percentage Fees. Nothing contained herein shall prohibit or disallow
the parties from modifying this Agreement to require the calculation or payment
of any Base Fee or Additional Fee to be based upon a percentage of gross or net
revenues of WMH.
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D. Generally Accepted Accounting Principles. For purposes of this Section
VI, net revenue shall be calculated in accordance with generally accepted
accounting principles consistently applied, but shall not include any Base Fee
or Additional Fee paid or payable under this Agreement.
VII. TERMINATION.
A. Termination for Cause.
1. Either party may terminate this Agreement for the following
Causes:
a. Committing or allowing to be committed any act of theft or
embezzlement by the other party or officer(s) or employee(s) thereof; however,
theft or embezzlement by any officer or employee of a party without the party's
knowledge shall not be cause for termination of this Agreement, as long as said
party repays to the Enterprise all sums which said officer or employee may have
stolen, or embezzled, as soon as the party becomes aware of facts from which a
reasonable person would conclude that such act occurred.
b. Committing or allowing to be committed any material breach
of the Agreement. A material breach of this Agreement shall be a failure of
either party to perform any duty or obligation required of a party under this
Agreement.
c. A material breach of any representations that adversely
affects a party's ability to carry out its responsibilities under this
Agreement.
2. Neither party may terminate this Agreement on grounds of material
breach unless it has provided written notice to the other party of its intention
to declare a default and to terminate this Agreement, and the defaulting party
fails to cure or take substantial steps to cure the default within twenty (20)
days of receipt of such notice. The discontinuance or correction of the material
breach shall constitute a cure thereof.
3. In the event of termination on account of IEC's breach, all
undistributed funds to which IEC otherwise would be entitled under this
Agreement shall be placed in an interest-bearing escrow account until the
dispute is resolved.
B. Remedies for Breach.
1. The parties shall in good faith attempt to resolve any
grievances, complaints or disputes that may arise under the performance of this
Agreement. An aggrieved party shall notify the other party in writing of any
serious problem which arising under the performance of this Agreement and shall
serve notice of the problems on the other party's address of record. Within ten
(10) days of receipt of such notice, unless the problem has been resolved, the
parties shall meet and confer in good faith for purposes of resolving the
problem.
2. Subject to the limitations set forth in subsection 1, any dispute
relating to
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and/or arising under this Agreement and/or the transactions contemplated herein
shall be submitted to binding arbitration before the American Arbitration
Association (the "AAA") in San Diego, California, and decided under the AAA's
Commercial Arbitration Rules. The prevailing party shall be entitled to seek
confirmation and enforcement of any arbitration award in any court of competent
jurisdiction.
3. In the event of any dispute relating to and/or arising under this
Agreement and/or the transactions contemplated herein, the prevailing party
shall be entitled to receive its reasonable attorneys' fees and its costs and
expenses of arbitration or litigation, in addition to any other relief to which
such party may be entitled.
VIII. NOTICES.
Any notice required to be given pursuant to this Agreement shall be
delivered by Express Mail or overnight courier service, addressed as follows:
To WMH at: Worldwide Media Holdings, N.V.
C/o Jennie Straatman
AMACO (Curacao) N.V.
Kaya W.F.G. (Jombi) Mensing 36
P.O. Box 3141
Curacao, Netherlands Antilles
with a copy to:
and to IEC at: Lloyd D. Speer II
Inland Entertainment Corporation
16868 Via Del Campo Court
Suite #200
San Diego, CA 92127
USA
With a copy to: Christopher Wm. Voisin
Secretary
Inland Entertainment Corporation
16868 Via Del Campo Court
Suite #200
San Diego, CA 92127
USA
or to their designees.
IX. COVENANT OF GOOD FAITH AND FAIR DEALINGS.
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IEC and WMH hereby specifically warrant and represent to each other that
neither shall act in any manner which would cause this Agreement to be altered,
modified, amended, canceled, or terminated (except for cause) without the
consent of the other.
X. ASSIGNMENTS, SUBCONTRACTS AND REPRESENTATIONS.
A. IEC shall not assign or subcontract any of its obligations under this
Agreement without WMH's prior written consent, provided that IEC may assign this
Contract unilaterally to a wholly owned subsidiary of IEC.
B. WMH and IEC warrant and represent that they shall take all action
necessary to ensure that this Agreement shall remain in good standing at all
time and will fully cooperate with each other in achieving the goals of this
Agreement.
C. The parties further specifically warrant that to their knowledge no
officer, director, or employee thereof is presently charged with or has been
convicted of any crime involving theft, fraud, misrepresentation, embezzlement
or other acts of dishonesty, and that no person convicted of any such act
knowingly will be allowed to become an officer, director or employee of a party
hereto.
XI. AUTHORITY TO EXECUTE.
Each party warrants to the other that it has full authority to execute this
Agreement and will, upon written request by the other party, provide
satisfactory written evidence thereof.
XII. NO LEASE OR POSSESSORY INTEREST.
The parties to this Agreement agree and expressly warrant that this
Agreement does not create a partnership, joint venture or any other similar
business relationship and does not convey any proprietary or possessory interest
except as may be set forth specifically herein. Moreover, the parties to this
Agreement further warrant and understand that this Agreement is for consulting
and marketing services only and does not relate to the management of the
Enterprise; does not grant to IEC the exclusive right to operate the Enterprise;
and does not prohibit WMH from encumbering its property and proprietary interest
in the Enterprise.
XIII. CONFLICTS OF INTEREST PROHIBITIONS.
A. The parties represent that no payments have been made and agree that
no payments will be made to any elected or appointed official of the government
of the Netherlands Antilles or relative of any elected or appointed member of
the government of the Netherlands Antilles, or of any other governmental
licensing or regulatory authority for the purpose of obtaining or maintaining
this Agreement or any other privilege for IEC. For purpose of this paragraph,
"relative" means an individual who is related to and lives in the immediate
household of an elected or appointed member of the Government of the Netherlands
Antilles.
B. No party in interest in either IEC or WMH is an elected or appointed
member of
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<PAGE> 8
the government of the Netherlands Antilles, or a relative of said
member as defined herein.
XIV. MODIFICATION.
This Agreement may be modified only with the formal written agreement of
both parties.
XV. SEVERABILITY.
In the event any provision of this Agreement is for any reason held to
be illegal or unenforceable, such provision will be severed or otherwise
modified as may best preserve the intention of the parties hereto, and the
Agreement as modified will remain in full force and effect.
XVI. RECITALS INCORPORATED.
The recitals set forth above are a material part of this Agreement, and
are incorporated herein as if fully set forth herein.
XVII. GOVERNING LAW.
This Agreement shall be governed by the laws of the State of California and
the United States. To the extent that there may exist a conflict of law in
regards to any intellectual property matters related hereto, as between the
State of California and the United States, the laws of the United States shall
apply. In all other instances, the laws of the State of California shall apply.
(Remainder of Page Left Intentionally Blank)
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XVIII. ENTIRE AGREEMENT.
This Agreement is the entire agreement between the parties with respect to
the subject matter of this Agreement. It is expressly understood that this
Agreement supersedes any and all other representations, or agreements entered
into between the parties hereto and that there are no oral, written or
collateral agreements between the parties or other parties with a financial
interest in the subject matter of this Agreement.
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
executed as of the day and year first above written.
WORLDWIDE MEDIA HOLDINGS, N.V.
a Netherlands Antilles corporation
By: /s/ Jennie E. Straatman
------------------------------------
Straatman, Jennie E.
Managing Director, Amaco
(Curacao) N.V.; Managing
Director of Worldwide Media
Holdings, N.V.
INLAND ENTERTAINMENT CORPORATION
A Utah Corporation
By: /s/ Lloyd D. Speer, II
------------------------------------
Lloyd D. Speer, II
Its: President/Chief Executive Officer
(SIGNATURE PAGE TO WMH/IEC CONSULTING & MARKETING AGREEMENT)
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EXHIBIT "A"
SCOPE OF CONSULTING SERVICES
INTERNET GAMING MARKETING
1. Marketing Plan.
A. Marketing and advertising budgets.
B. Goals and objectives.
C. Strategies and tactics.
D. Evaluation and measurement.
2. Research projects and analysis of data.
3. Customer service.
4. Media negotiations and placement.
A. Identify target market.
B. Recommend reach and frequency media goals.
C. Evaluate advertising proposals from radio, television, outdoor,
newspaper, magazine and display companies.
D. Recommend schedules and budgets for each medium, including duration
and detail of contracts with all of the above.
5. Advertising/Promotion.
A. Direction, tone and quality of advertising and marketing programs.
B. Assist with selection of advertising agencies and consultants with
strong Internet gaming background.
C. Guiding the creative output with respect to gaming casino advertising.
D. Specific concept and production for television and radio commercials.
E. Developing outdoor advertising, newspaper, television, radio, and
on-line campaigns.
6. Special Events and Entertainment.
A. Developing event calendars and strategy for implementing them.
B. Developing concepts for entertainment, special events and promotions.
C. Market wide Promotions.
7. Collateral materials, brochures and direct mail, design production and
distribution.
8. Strategies for public relations, publicity and community relations.
9. Uniforms.
10. Community relations and political affairs.
11. Recommending new cardroom games.
12. Presenting a professional image to the public.
13. Introduction and operation of tournaments.
14. Casino layout.
15. Gaming incentives for players.
16. Seeking new clientele.
17. Analyzing daily, weekly and other periodic reports.
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EX - 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.
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EX - 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated August 11, 1999, accompanying the
financial statements included in the Annual Report of Inland Entertainment
Corporation on Form 10-KSB for the year ended June 30, 1999. We hereby consent
to the incorporation by reference of said report in the Registration Statements
of Inland Entertainment Corporation on Form S-8 (File Nos. 333-19743, effective
January 14, 1997, 333-19745, effective January 14, 1997, 333-19747, effective
January 14, 1997, 333-44179, effective January 13, 1998 and 333-82169, effective
July 2, 1999).
/s/ GRANT THORNTON LLP
Los Angeles, California
September 27, 1999
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