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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D. C. 20549
FORM 10-KSB
(X) Annual report pursuant to sections 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended September 30, 1999.
() Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act or 1934.
Commission File Number 0-23914
Entertainment Technologies & Programs, Inc.
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(Name of Small Business Issuer in its charter)
Delaware 87-521389
- -------- ---------
(State or other jurisdiction of I. R. S. Employer ID No.
Incorporation or organization)
16055 Space Center Blvd., Ste. 230 Houston, Tx 77062
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(Address of principal executive office) (Zip Code)
(281) 486-6115
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(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock $.001 par value
(Title of Class)
Check whether the issuer (1) filed all reports to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 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 is not contained herein and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III for this Form 10-KSB or any amendment to
this Form 10-KSB.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on September
30, 1999 as reported on the NASDAQ Electronic Bulletin Board, was $6,292,501.
Shares of Common Stock held by each executive officer and director and by each
person who owns 5% or more of the outstanding Common Stock have been excluded in
that such persons may be deemed affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.
The issuer's revenues for the year ended September 30, 1999 totaled $5,153,961
As of January 31, 2000, Registrant had outstanding shares of Common Stock of
32,734,422
DOCUMENTS INCORPORATED BY REFERENCE
NONE
Transitional Small Business Disclosure Format Yes ( ) No (X)
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ENTERTAINMENT TECHNOLOGIES AND PROGRAMS, INC.
ANNUAL REPORT ON FORM 10-KSB
SEPTEMBER 30, 1999
Table of Contents
PART I
<TABLE>
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<S> <C> <C>
Item 1 Business......................................................................... 3
Overview......................................................................... 3
The Divisions.................................................................... 4
NiteLife Military Entertainment, Inc............................................. 4
Performance Sound and Light, Inc................................................. 4
Stargate Entertainment, Inc...................................................... 5
Employees........................................................................ 6
General Risks Associated with Business Activities................................ 6
Item 2 Description of Properties........................................................ 7
Item 3 Legal Proceedings................................................................ 7
Item 4 Submission of Matters to a Vote of Security Holders.............................. 8
PART II
Item 5 Market for the Common Equity and Related Stockholder Matters..................... 8
Item 6 Management's Discussion and Analysis............................................. 9
Item 7 Financial Statements............................................................. 10
Index to Consolidated Financial Statements
Report of Independent Certified Public Accountant
Consolidated Balance Sheet as of September 30, 1999
Consolidated Statements of Operations for the years ended
September 30, 1999 and September 30, 1998
Consolidated Statements of Stockholders' Equity for the years ended
September 30, 1999 and September 30, 1998
Consolidated Statements of Cash Flows for the years ended
September 30, 1999 and September 30, 1998
Notes to Consolidated Financial Statements
Item 8 Changes in and Disagreements with Accountants on Accounting and.................. 10
Financial Disclosure
PART III
Item 9 Directors, Executive Officers, Promoters and Control Persons:.................... 11
Compliance with Section 16(a) of the exchange Act
Item 10 Executive Compensation........................................................... 12
Item 11 Security Ownership of Certain Beneficial Owners and Management................... 13
Item 12 Certain Relationships and Related Transactions................................... 14
Item 13 Exhibits and Reports on Form 8-K................................................. 14
</TABLE>
2
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PART I
------
The Company is including the following cautionary statement in this Annual
Report on Form 10-KSB to make applicable and take advantage of the safe harbor
provision of the Private Securities Litigation Reform act of 1995 for any
forward looking statements made by, or on behalf of the Company. Forward
Looking statements include statements concerning plans, objectives, goals,
strategies, future events or performance and underlying assumptions and other
statements which are other than statements of historical facts. Certain
statements contained herein are forward looking statements and, accordingly,
involve risks and uncertainties which could cause actual results or outcomes to
differ materially from those expressed in the forward looking statements. The
Company's expectations, beliefs and projections are expressed in good faith and
are believed by the Company to have a reasonable basis, including without
limitations, management's examination of historical operating trends, data
contained in the Company's records and other data available from third parties,
but there can be no assurance that management's expectations, beliefs or
projections will result or be achieved or accomplished. In addition to other
factors and matters discussed elsewhere herein, the following are important
factors that, in the view of the Company, could cause actual results to differ
materially from those discussed in the forward looking statements: the ability
of the Company to obtain acceptable forms and amounts of financing to fund
future operations; demand for the Company's services; and competitive factors.
The Company disclaims any obligation to update any forward looking statements to
reflect events or circumstances after the date hereof.
ITEM 1 - BUSINESS
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OVERVIEW
The Company is a Delaware corporation. Prior to April 1995, it had not
engaged in any material operations since approximately 1988. In April 1995, the
Company entered into a reorganization transaction with the shareholders of
NiteLife, Inc. ("NiteLife"), at that time a California corporation and is now a
Texas Corporation, consequently the assets and the business of NiteLife became
the Company.
NiteLife was incorporated on October 2, 1985, by James D. Butcher, the
Company's Chairman, CEO and its principal stockholder. The Company was formed
to provide audio and video entertainment at military bases located in the United
States and abroad: to provide mobile musical entertainment; and to operate a
music store in San Diego, California. Since its formation, the Company has
expanded both the number of products and services it provides and the markets
into which such products and services are distributed. Today, the Company is
strategically positioned as the provider of a comprehensive array of
entertainment products and services to both military and civilian markets.
The Company's business is currently operated through three (3) divisions
("Divisions"): NiteLife Military Entertainment, Inc. (club development and
management division), Performance Sound and Light, Inc. (equipment retail
division), Stargate Entertainment, Inc. (Family Entertainment Center (FEC) and
Water park).
The Company is engaged, through its three divisions, in:
1. The operation of entertainment facilities located on U. S. military
bases throughout the world. The designing, planning, promotion, and
production of live performances and entertainment booking in both the
military and the civilian markets.
2. The design and the retail sale of professional sound and lighting
equipment through mail order catalogs targeting the military market
through NAF purchase agreements and both the military and civilian
consumer markets.
3. Ownership installation and operation of amusement equipment in company
owned and operated facilities. The designing and construction of
entertainment facilities and restaurants and the operation of a water
park
3
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THE DIVISIONS
NiteLife Entertainment
Overview
NiteLife Entertainment is engaged in the installation and operation of
nightclub facilities on U. S. military bases located in the United States,
Europe and Asia. At present, NiteLife Entertainment operates approximately 102
entertainment systems. Nightclubs have historically been established on
military bases by military leaders in an attempt to: (1) retain service men and
women on base, thereby avoiding potential problems arising out of interaction
between service personnel and civilians, and (2) boost morale by providing U. S.
style entertainment in foreign countries where none otherwise exists.
In order to meet the needs of this market, NiteLife provides a wide
variety of entertainment programs and services to base clubs. NiteLife
typically installs audio and video equipment, including a custom built disc
jockey booth, state of the art industrial DVD players and turntables, top of the
line mixing consoles and several 26" television monitors in each club. NiteLife
provides maintenance of all the equipment installed in a club and supplies all
of the compact discs and music video discs for use within its clubs. NiteLife
also designs and produces club promotions for club managers.
The comprehensive package of entertainment equipment and services is
provided by NiteLife to military customers on a fee basis, pursuant to a one
year renewable contract between the Company and the Air Force Non-Appropriated
Fund Purchasing Office (AFNAFPO). Each contract provides for a minimum number
of hours of disc jockey services at a specified hourly rate. These minimum
hours are established so that NiteLife recovers its investment within eight
months of operation.
Vision Quest Productions ("Vision Quest"), a DBA of Nitelife Military
Entertainment, Inc., is engaged in the booking, promotion and production of live
local and nationally recognized concert acts on military bases around the world.
In 1993, the Company was selected by the Pacific Air Force to produce a program
entitled "Stateside Sounds" which brought top 40 bands within the Asian theater
for a tour of U. S. military bases. "Sounds of NiteLife" is a program, which
has been produced by the Company since 1993, and brings rock, top 40 and country
acts on military bases located throughout the United States and Asia. On
December 10, 1999 Vision Quest opened VQLive, a local club providing live
entertainment.
The Future of NiteLife Entertainment
It has been the experience of the Company's management that, with the
continued loss of military budget funding, military clubs must become self-
sufficient or they will be closed. With the Company's turnkey club installation
and operation program, an existing military nightclub can be renovated with no
capital outlay by the military customer. The Company's management believes that
the continued loss of defense funding provides a basis for growth of the
NiteLife division through new installations both in the near and distant future
to military bases located in the Southeast and Central areas of the United
States.
Risk Factors
. The downsizing of the military, which began in the 1990's, will reduce
the total number of military installations that remain open.
. This division produces the bulk of the profits and free cash flow for
the Company. However, the cash flow that it produces is not sufficient
to support the current debt of other operational divisions of the
Company and the Company overhead.
. The assets of NiteLife Entertainment will be used in any restructure of
corporate debt.
PERFORMANCE SOUND AND LIGHT
Overview
Performance Sound and Light ("PS&L") is engaged in providing professional
sound and lighting equipment to military clubs and others through direct sales
efforts and through catalogs and Internet sales.
4
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PS&L produces two mail order catalogs, each targeting a specific market
niche. The first catalog offers sound and lighting equipment to the military
consumer. PS&L also has an AFNAF number for sales to the Military. The
Company's management perceives an opportunity exists to provide business and
institutional purchases of turnkey sound and lighting systems in an easy to read
mail order catalog.
The second catalog targets the general consumer. This catalog contains
professional sound and lighting equipment. Although there are many companies
offering this type of catalog, the Company believes that, as a result of the
Company's presence on military bases, it possesses a unique ability to be
extremely price competitive.
The Future of Performance Sound & Light
Through the development of a WEB site, PS&L expects to be on the forefront of
the very exciting world of electronic commerce. PS&L expects a period of very
solid growth over the next 18 to 24 months, by attracting new customers through
our Internet site and the distribution of a new CD-ROM based catalog to the U.S.
Military. Visit PS&L's website at www.performance-s-l.com.
Risks Factors
. A substantial investment in the design, production and mailing costs of
a catalog must be made prior to any sales being realized. Consequently,
there can be no assurances that the catalogs will generate sufficient
sales in order for the Company to recover its investment.
. This division needs substantial additional capital to create and
maintain consistent growth and inventory.
. All profits from this operation are going back to growth of this
division so Performance Sound & Light is not contributing to the debt
and expenses of the Company.
STARGATE ENTERTAINMENT, INC.
Stargate Entertainment, Inc. ("Stargate") is presently undergoing a major
restructuring to position itself in the Family Entertainment Center ("FEC")
industry. This move was due in part, to the recent decline in game revenues
affecting route operators in the industry. Qualifying factors for an FEC makes
this a natural progression for the Company and will also enable Stargate to take
full advantage of the growth potential of entertainment centers.
Stargate acquired its first civilian FEC, "Hero's Family Fun Center,"
located in Pasadena, Texas. Hero's occupies a 16,000 square foot stand alone
building. The center offers entertainment for the family unit and includes
laser tag, soft play area, redemption center, high-end video games, restaurant
and party rooms.
Future plans for Stargate include building and operating an additional
entertainment center in the Houston area. The center may operate different
attractions to fit their specific demographic population; however, both
facilities will feature video games and laser tag attractions currently owned by
the Company.
Hero's Waterworld opened for its first season in May 1999. Located on
the property is a 220 square foot restaurant and a International Motor Car
approved racetrack that are currently leased to a third party.
Risk Factors
. A substantial investment in the build out, attractions, and amusement
games is required to open an entertainment center. Proposed sites must
be studied extensively by identifying the surrounding demographics,
competition, and capitalization requirements versus projected revenues.
A reasonable amount of time is required to carefully study these factors
in order to prevent over/under capitalizing a center. There is no
guarantee that a center will be able to support itself and its debt
service with its operations.
. The water park in Midland/Odessa, Texas is a seasonal operation. Its
success depends partly on weather related issues. Substantial amounts of
cash are required to add new attractions to ensure customers want to
come back, and attract a new customer base. Also, there is no guarantee
that the tenants will renew their lease for the restaurant or the
racetrack upon maturity of the lease agreements.
5
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. This division depends on large amounts of capital to complete and finish
projects that are currently in process.
EMPLOYEES
As of September 30, 1999, the Company had approximately 134 employees, of
which 34 are full time and 100 are employed part time. The Company's employees
are not represented by any collective bargaining agreements, and the Company has
never experienced a work stoppage. The Company believes that its employee
relations are good, though employee morale fluctuates with the Company's lack of
capital and ability to meet obligations in a timely manner.
Company Number of Employees
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Entertainment Technologies & Programs, Inc. 6
Performance Sound & Light, Inc. 4
NiteLife Military Entertainment, Inc. 8
Stargate Entertainment, Inc. 116 Some seasonally
GENERAL RISKS ASSOCIATED WITH BUSINESS ACTIVITIES
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Government Contracts
- --------------------
The Company's dealings with the U. S. government, specifically the
Department of Defense ("DOD") and the various branches of the military, are
contracted through the Air Force Non Appropriated Fund Purchasing Office
("AFNAFPO"). This type of contract allows the Company to contract with the
service branches of the military without going through the competitive bidding
process each time. The Company has been awarded two AFNAF contracts. One AFNAF
contract involved the Company installing approximately 102 operating facilities.
These contracts are typically renewed annually. There can be no assurances that
the DOD will renew these contracts. Should such contracts not be renewed, the
Company will be required to bid competitively for each contract it enters into
with the military.
Competition
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The Company on the civilian market will be in direct competition with other
entertainment facilities and services. Many such companies with whom the
Company will compete have financial and marketing resources that are
substantially greater than those possessed by the Company. There can be no
assurance that the Company will be able to effectively compete with its
competitors in its dealings in the civilian markets. However, because of the
Company's unique state resulting from its AFNAF contracts, the Company believes
it possesses a competitive advantage when providing entertainment services and
products to the military markets.
Dependence on Key Personnel
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The success of the Company is dependent upon, among other things, the
continuing services of James Douglas Butcher. Mr. Butcher is Chief Executive
Officer and Chairman of the Board of Directors of the Company. Mr. Butcher is
in good health; however, his retirement, disability or death would have a
significant adverse impact on the Company's business. The Company has entered
into an employment agreement with Mr. Butcher, and the Company maintains a total
of $500,000 life insurance coverage on the life of Mr. Butcher.
Management anticipates the hiring of additional personnel to assist it in
implementing its plan of operations. There can be no assurance that the Company
will be able to attract and train key employees to implement its business plan.
Control of the Company
- ----------------------
Mr. Butcher, the Company's Chief Executive Officer and Chairman of the
Board of Directors, and William Michael Grasberger, it's Secretary and Director,
beneficially own approximately 33.76% and 8.04% respectively, of the Company's
outstanding common stock. Collectively, Messrs. Butcher and Grasberger may be
deemed to have absolute control over the management and affairs of the Company.
6
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No Dividends
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The Company has never paid cash dividends on its Common Stock and does
not intend to pay cash dividends on its Common Stock in the foreseeable future.
ITEM 2 - DESCRIPTION OF PROPERTIES
- ----------------------------------
The Company leases office space at the monthly rate of $4,330.75
consisting of approximately 4,076 square feet, for its corporate headquarters at
16055 Space Center Blvd., Suite #230 Houston, Texas 77062. The lease expires on
March 31, 2001.
Performance Sound & Light leases office space at the monthly rate of
$1,153.20 consisting of approximately 1,922 square feet for its operations at
1020 Hercules Ave. Houston, Texas 77058.
Hero's Waterworld is approximately 90.27 acres in the County of Midland,
State of Texas consisting of an 18 acre waterpark, a 220 square foot restaurant
and a International Motor Car Approved 1/8 mile speedway in addition to 50 +
acres of raw land.
Hero's Entertainment Center is a 2.2-acre parcel of land located at 7770
Spencer Highway, Pasadena, Texas 77505, consisting of a 16,000 square foot
building.
NiteLife leases a mini warehouse from Coastal Storage in Seabrook, Texas
77586.
VQLive leases approximately 6,000 square feet from Chacho's Grill and
Cantina
ITEM 3 - LEGAL PROCEEDINGS
- ---------------------------
1. No. 236-179032-99; Parks at Arlington, L. P. vs. Entertainment
Technologies & Programs, Inc. d/b/a Hero's Family Fun Center; In the
District Court of Tarrant County, Texas; 236th Judicial District
This case founded on a lease agreement executed by the company for retail
lease space in a shopping mall located in Arlington, Texas. This case was
filed in early 1999, seeking $124,727.21 in damages for breach of lease.
The case has not been aggressively pursued by the plaintiff and little
pretrial discovery has been completed. Management's position is that the
plaintiff fraudulently induced the company to enter into the lease
agreement by misrepresentation of the ability of the mall to support the
activities offered at the shopping mall. As a result of this
misrepresentation, there was insufficient business revenue to support the
company's proposed venture in the mall. A counter-claim based on fraud and
misrepresentation is being prepared. In the opinion of legal counsel, the
company has good prospects to either win this case or negotiate a
satisfactory settlement prior to any actual trial.
2. No. DV99-025444-j; Entertainment Technologies & Programs, Inc. vs.
Bronco Group, Mgt., Inc. and Bowling & Billiard Supply Company, Inc.;
191st Judicial District Court; Dallas County, Texas
This case is a breach of contract case. The company entered into an
agreement with Bronco Group Management, Inc. whereby the company received
the sole and exclusive right to install, operate and maintain coin operated
video games in a specified entertainment area in Dallas, Texas. The
defendant breached the contract by removing the company's equipment and
substituting said equipment for the equipment of Bowling & Billiard Supply
Company, Inc. Bowling & Billiard Supply Company, Inc. has been sued for
tortious interference with the company's business relationship with Bronco.
The contract between the company and Bronco contained a mandatory binding
arbitration clause and the Dallas District Court has ordered the case to
binding arbitration. In the opinion of legal counsel, the arbitration
shall result in significant damages being awarded to the company for breach
of the relevant contract.
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3. No. 9947637; Entertainment Technologies & Programs, Inc. vs. GFC
Communications, Inc.; In the District Court of Harris County, Texas;
157th Judicial District
This is a Petition to Compel Arbitration. On November 2, 1998 the company
and GFC Communications, Inc. entered into a written agreement wherein GFC
was to provide shareholder and financial communication services to the
company and serve, when requested, as the company's liaison and
spokesperson. The services were to include timely responses by fax,
telephone or mail, to all inquiries related to the company from the press,
shareholders and other interested parties. GFC has breached the contract
with the company. The contract between the company and GFC required
mandatory arbitration in the in the event of a dispute and the Petition to
Compel Arbitration is in compliance with that term of the original contract
agreement. In the opinion of legal counsel, the company is expected to
prevail in the mandatory mediation and be awarded damages in some amount.
4. No. 98-08926; Entertainment Technologies & Programs, Inc. and Stargate
Entertainment, Inc. vs. Vincent Schappell d/b/a All Prime Amusement; In
the District Court of Harris County, Texas; 190th Judicial District
This is a breach of contract case concerning a dispute over the removal of
video games supplied by the defendant from the company via Hero's Family
Fun Center located in Pasadena, Texas. The defendant has filed a
counterclaim seeking damages in excess of $100,000.00; however, the
contract between the parties contains a liquidated damage clause limiting
any possible recovery in favor of the defendant on its counterclaim to one
month of revenues which is estimated to be $9,000.00 or less. Management
intends to go to trial on this case and there is reasonable possibility
that the company will prevail on the merits in this case.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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In February 2000 it was voted and agreed that the Board of Directors
will be compensated 50,000 shares for serving one complete year on the board and
attending all meetings as required except as operational directors work
requirements may dictate. If the number of directors is to increase from the
current seven members to nine members, board compensation will decrease to
35,000 shares per director per year.
PART II
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ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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Absence of Public Market: Instability of Stock Price
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The shares of the Company are trading on the NASD OTC Electronic Bulletin
Board under the stock ticker symbol "ETPI" (CUSIP 293810107); however, there is
no "established trading market" for the shares of common stock of the Company,
and no assurance can be given that such a market will develop. If an
"established trading market" for the Company's common stock does develop in the
future, there can be no assurance that it will continue or be maintained. Any
market price for shares of common stock of the Company is likely to be very
volatile, and factors such as competition, governmental regulation and
fluctuations in operating results may all have a significant effect. In
addition, the stock markets generally have experienced and continue to
experience extreme price and volume fluctuations which have affected the market
price of many small capital companies and which have often been unrelated to the
operating performance of these companies. These broad market fluctuations, as
well as general economic and political conditions, may adversely affect the
market price of the Company's common stock.
The sale of "restricted securities" held by members of management and
others could also have an adverse effect on any such market; currently,
32,334,422 shares of the Company's common stock are outstanding 23,281,492 of
which are designated as "restricted securities." Of this amount, 14,995,195
shares of these "restricted securities" have been held for a sufficient period
of time to be sold under Rule 144 of the Securities and Exchange Commission.
8
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<TABLE>
<CAPTION>
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COMMON
NON-NASDAQ OTC:
DATE VOLUME HIGH ASK LOW BID AVERAGE CLOSE
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<S> <C> <C> <C> <C>
OCT 30, 1998 1,027,800 .63 .23 .37
NOV 30, 1998 573,700 .45 .22 .25
DEC 31, 1998 3,638,400 .53 .13 .26
JAN 29, 1999 3,671,900 .82 .25 .44
FEB 26, 1999 1,135,200 .49 .21 .40
MAR 31, 1999 2,528,600 .44 .26 .35
APR 30, 1999 1,017,500 .34 .19 .20
MAY 28, 1999 1,233,400 .24 .19 .19
JUNE 30, 1999 2,939,000 .28 .13 .19
JULY 30, 1999 1,730,700 .27 .14 .18
AUG 31, 1999 10,718,800 .49 .12 .28
SEPT 30, 1999 1,813,500 .34 .25 .22
</TABLE>
***These quotations do not represent actual transactions, and do not reflect
broker/dealer mark-ups, mark-downs or commissions.
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ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS
- ---------------------------------------------
Results of Operations
During 1998 the Company changed its fiscal year end to September 30, 1998.
Accordingly, a statement of operations for the nine months ended September 30,
1998 was filed. In order to make a more meaningful period-to-period comparison
of the Company's operating results, the following table presents certain
historical financial data for the year ended September 30, 1999 as compared to
certain annualized proforma financial data for the year ended September 30,
1998. The annualized proforma financial data represents the actual historical
financial data for the nine months ended September 30, 1998 that has been
annualized to produce financial data for the year ended September 30, 1998. The
annualized proforma financial data is not necessarily indicative of the results
that would have occurred had the actual financial data for the year ended
September 30, 1998 been presented.
<TABLE>
<CAPTION>
Historical Proforma
Year Ended Year Ended
September 30, September 30,
1999 1998
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Total revenue $5,153,961 $4,640,567
Gross margin 2,268,376 2,715,983
General and administrative expense 3,018,379 2,855,345
Depreciation and amortization expense 877,963 671,907
Interest expense 1,219,703 317,525
Loss (gain) from discontinued operations 810,326 (25,061)
Cumulative effect of change in accounting
for start-up expenses 170,611 -
</TABLE>
Revenues for the year ended September 30, 1999, increased $513,594 or 11.1%
to $5,153,961 from $4,640,567 for the proforma year ended September 30, 1998.
This increase was due to increased revenues in PS&L and the opening of Hero's
Waterworld during 1999.
Gross margin for the year ended September 30, 1999, decreased ($447,607) or
(16.5)% to $2,268,376 from $2,715,983 for the proforma year ended September 30,
1998. This decrease was due to the high cost associated with the initial year
operations of Hero's Waterworld and the lower margins earned on its foreign
military entertainment operations.
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General and administrative expenses for the year ended September 30, 1999,
increased $163,034 or 5.7% to $3,018,379 from $2,855,345 for the proforma year
ended September 30, 1998. This increase is generally attributable to additional
costs of opening Hero's Waterworld and the increase in revenue during fiscal
year 1999.
Depreciation expense for the year ended September 30, 1999, increased
$206,056 or 30.7% to $877,963 from $671,907 for the proforma year ended
September 30, 1998. The increase is due to the acquisition of sound and lighting
equipment and the remodeling of Hero's Waterworld in fiscal year 1999.
Interest expense increased $902,178 to $1,219,703 for the year ended
September 30, 1999, from $317,525 for the proforma year ended September 30,
1998. The increase is due to the high costs associated with the addition of
approximately $2,000,000 of new debt in fiscal year 1999.
In October 1998 the Company changed its method of accounting for start-up
costs. The change involved expensing these costs as incurred, rather than
capitalizing and subsequently amortizing such costs. The change in accounting
principle resulted in the write-off of $170,611 which has been expensed and
included in the accompanying 1999 consolidated statement of operations.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended September 30, 1999 and the nine months ended September
30, 1998, the Company has experienced negative financial results as follows:
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
September 30, September 30,
1999 1998
-------------- --------------
<S> <C> <C>
Net loss $(3,830,948) $ (827,780)
Negative cash flows from operations (913,276) (160,021)
Negative working capital (2,221,853) (768,420)
Accumulated deficit (6,165,916) (2,334,968)
</TABLE>
In addition to negative financial results, the Company has also experienced
operational problems as follows:
. Redfish Management, Inc. ("RMI"), a wholly owned subsidiary of the Company,
filed for Chapter 11 bankruptcy protection to allow the Company to limit
future losses by its restaurant operations.
. The Company has been delinquent on payments of principal for a significant
portion of its note payable and capital lease obligations.
. The Company is in violation of various financial and non-financial covenants
included in certain of its notes payable and capital lease agreements for
which waivers have not been obtained. Accordingly, debt under those
agreements has been classified as current in the accompanying financial
statements and could be called by the creditors.
Management has developed specific plans to address its current financial
situation as follows:
. The Company has signed a letter of intent with an investment company under
which the investment company will use its best efforts to raise from $3.0
million to $4.7 million on behalf of the Company. The Company will use the
proceeds from this new debt financing, if received, to repay existing
delinquent debt and to support its continuing operations.
. The Company has obtained extensions on the maturity of $2,600,000 of its
notes payable ("Investor Notes") to October 1, 2000.
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<PAGE>
. The Company has adopted plans to discontinue its restaurant operations
because those operations require significant amounts of debt financing and
have contributed significantly to the Company's financial problems. Seeking
Chapter 11 bankruptcy for Redfish Management, Inc. was a step necessary to
allow the Company to eliminate those operations without increasing risk to
its more profitable operations.
Management of the Company believes that with the extension of its Investor
Notes and with its current business plans that it will ultimately achieve
adequate profitability and cash flow from operations in order to meet its
current obligations and fund the continuation of its business operations.
ITEM 7 - FINANCIAL STATEMENTS
- -----------------------------
The Company's audited Financial Statements for the years ended September
30, 1999, and the nine months ended September 30,1998 are presented on the
following pages.
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
On September 3, 1999, the Company was notified by Brian S. Nathanson, CPA
("Brian S. Nathanson") that he would not be continuing as the Company's
independent accountant. The Company engaged Ham, Langston & Brezina, L.L.P.
("Ham, Langston & Brezina") as its new independent accountant. The decision to
change the Company's independent accountant was recommended and approved by the
Company's Board of Directors.
Brian S. Nathanson's reports on the Company's consolidated financial
statements for the nine months ended September 30, 1998 and the year ended
December 31, 1997, respectively, did not contain an adverse opinion or
disclaimer of opinion, nor were such reports qualified or modified as to
uncertainty, audit scope, or accounting principles.
During the Company's two fiscal years ended September 30, 1998 and the
subsequent interim period preceding the decision to change independent
accountants, there were no disagreements with Brian S. Nathanson on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreement(s), if not resolved to the
satisfaction of Brian S. Nathanson, would have caused it to make a reference to
the subject matter or the disagreement(s) in connection with its reports
covering such periods.
During the Company's two fiscal years ended September 30, 1998 and the
subsequent interim period preceding the decision to change independent
accountants, there were no "reportable events" (hereinafter defined) requiring
disclosure pursuant to Section 229.304(a)(1)(v) of Regulation S-K. As used
herein, the term "reportable event" means any of the items listed in paragraphs
(a)(1)(v)(A)-(D) of Section 304 of Regulation S-K.
Effective September 28, 1999, the Company engaged Ham, Langston & Brezina
as its independent accountants. During the two fiscal years ended September 30,
1998 and the subsequent interim period preceding the decision to change
independent accountants, neither the Company nor anyone on its behalf consulted
Ham, Langston & Brezina regarding either the application of accounting
principles to a specified transaction, either completed or proposed, or the type
of audit opinion that might be rendered on the Company's consolidated financial
statements, nor has Ham, Langston & Brezina provided to the Company a written
report or oral advice regarding such principles or audit opinion.
11
<PAGE>
PART III
--------
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
- ----------------------------------------------------------------------
COMPLIANCE WITH SECTION16(a) OF THE EXCHANGE ACT.
- -------------------------------------------------
The following table sets forth-certain information concerning the Company's
executive officers and directors:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
James Douglas Butcher 40 Chairman of the Board and CEO
Leonida Butcher 43 Director
William M. Grasberger 45 Secretary and Director
Mark Madamba 37 Director
Jeffery Thornton 43 Director
Gobind Sahney 37 Director
Douglas Miller 36 Director
</TABLE>
JAMES "DOUG" BUTCHER, the Company's founder, Chairman of the Board of
Directors and Chief Executive Officer, formed a mobile music company in 1978,
while in the Navy, to provide entertainment services to the military nightclub
at the bases on which he was stationed. After being transferred to San Diego in
1980, Mr. Butcher continued in the entertainment business obtaining several Navy
contracts in the San Diego area. By 1982, after departing the Navy, the disc
jockey business became a full time venture based on two clubs, one mobile D. J.
system and a need for quality entertainment. Mr. Butcher has built the Company
into the provider of comprehensive entertainment service and products it is
today.
WILLIAM MICHAEL GRASBERGER, President, NiteLife Entertainment, has been
with NiteLife since 1983. Prior to joining the Company, Mr. Grasberger has a
Bachelor of Arts degree from California State University of Pennsylvania where
he won the Distinguished Service Award for his work in radio and television,
student government and academics. Mr. Grasberger was the founder of Video Link,
which distributes music videos to clubs and restaurants and most importantly,
provides the Company with its music videos. The Video Link television show,
developed by Mr. Grasberger in 1986, is still being seen around the world on the
Armed Forces Television Network.
MARK MADAMBA, President, Stargate, Inc. since May 1994. After graduating
from high school in 1980, Mr. Madamba entered the Technical Vocational Institute
of New Mexico. At age 19, he successfully completed and received a two-year
diploma in digital electronics. Mr. Madamba then moved to Kadena Air Base,
Japan where he began working as an electronic technician in the Air Force slot
machine program. In 1986, he designed and produced an electronic circuit board
to eliminate a computer design error in the base's slot machines. The new
circuit was used throughout the Air Force and was eventually sold to the
manufacturer as well. Mr. Madamba subsequently was recognized as the top
electronic troubleshooter in the Air Force slot machine program and was
transferred to the Headquarters Air Force Morale, Welfare and Recreation
Department in San Antonio, Texas. There he served as a Technical Advisor and
Program Manager for the thirty million dollar a year Air Force slot machine
program encompassing over 35 bases worldwide. Using computer aided design
programs, Mr. Madamba designed eleven new games that were installed as a
modification to existing machines. He also developed all game and machine
specifications for the Air Force's first video poker and stepper motor driven
slot machine. In 1990, Headquarters Pacific Air Forces employed Mr. Madamba to
provide technical and management oversight to ten bases in the Pacific Rim.
Based at Osan Air Base, South Korea, he was directly responsible for the slot
program at Osan Air Base.
JEFFERY THORNTON, President, Vision Quest Productions. Mr. Thornton is an
honors graduate of the University of Northern Colorado, with a degree in
Recreation Administration and a minor in Business. Mr. Thornton began his
professional career as the first Parks and Recreation Director for a Southwest
Native American Indian Tribe, the Pascua Yaqui Tibe in Tucson, Arizona.
Subsequently, Mr. Thornton was hired as the Recreation
12
<PAGE>
coordinator for the Air Force Logistics Command at Wright Patterson Air Force
Base, Dayton, Ohio. His supervision of recreation and sports activities extended
to six bases throughout the United States. Following that, Mr. Thornton became
the Recreation Director for the Naval Training Center in San Diego, which
included eleven facilities and over 500 personnel. After five years with NTC,
Mr. Thornton became the Moral, Recreation and Club Director for the Submarine
Base San Diego, and was in charge of all operations on the base. In addition to
his other duties, Mr. Thornton wrote the "NiteLife Handbook of Club Programs and
Fun", a detailed event planning guide, published and distributed by the Company,
and used extensively by military clubs worldwide.
JAMES D. BUTCHER AND LEONIDA BUTCHER, both directors of the Company, are
husband and wife. Other than Mr. and Mrs. Butcher, there are no family
relationships between any director and executive officers of the Company, either
by blood or by marriage.
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers and directors and persons who own more than ten percent
of a registered class of the Company's equity securities to file various reports
with the Securities and Exchange Commission and the National Association of
Securities Dealers, Inc. concerning their holdings of, and transactions in,
securities of the Company. Copies of these filings must be furnished to the
Company.
DOUGLAS W. MILLER, Director, is a native of San Diego, California and
President of Capital Growth Planning, Inc. He began his association with
Capital Growth Planning in August of 1988 after graduating from Fresno State
University with an emphasis in Financial Services and successful completion of
the Northwestern Mutual Life Insurance Company management training program.
Company responsibilities include: personal sales, product development and
marketing, as well as recruiting, training, and management of company
representatives. Mr. Miller holds licenses in Securities, Real Estate, and
Insurance.
GOBIND SAHNEY, Director, has a background in finance and business
management; past experience includes advising small to mid-size companies on
organizing and/or reorganizing themselves to identify investors, attract
capital, and/or recruit qualified managers and directors capable of guiding the
companies to a higher level of performance and recognition. Mr. Sahney is a
graduate of Babson College with dual degrees in Finance and Accounting.
ITEM 10 - EXECUTIVE COMPENSATION
- --------------------------------
The following table sets forth information concerning compensation of the chief
executive officer and all other executive officers of the Company whose salary
and bonus exceeded $100,000 for services rendered to the Company.
Summary Compensation Table (1)
Annual Compensation
---------------------------------------
Name and Other Annual
Principal Position Year Salary Bonus Compensation
- ------------------ ---- ------ ----- ------------
James D. Butcher 1999 $156,000 (1)
President and Chief
Executive Officer
(1) The Company currently has not adopted any bonus, profit sharing or long-
term compensation plan providing any executive officer, director or
employee with any compensation except as provided above.
EMPLOYMENT AGREEMENT
Effective November 10, 1995, the Company entered a ten-year employment
agreement with James D. Butcher. The Agreement provides for an annual salary of
$156,000, increasing to $240,000 upon completion of a secondary offering or
adequate funding. All future increases will be at the discretion of the Board
of Directors Compensation Advisory Committee. The Agreement may be terminated
upon death, disability or for "just cause" (as defined therein).
13
<PAGE>
COMPENSATION OF DIRECTORS
The Company's Board of Directors is comprised of employees of the Company
and two outside board members, and receives 50,000 shares of restricted common
stock plus travel expenses in connection with attending Board Meetings.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of September 30, 1999, for (a) each
person known by the Company to own beneficially more than 5% of the Common
Stock, (b) each director, (c) each executive officer identified in the
compensation table above, and (d) officers and directors of the Company as a
group.
<TABLE>
<CAPTION>
Name of Beneficial Number of Shares Percentage
Owner Beneficially Owned Owned
- --------------------------- ------------------ -----------
<S> <C> <C>
James D. Butcher & 10,260,169 33.76%
Leonida Butcher
480 Kirby Rd.
Seabrook, TX 77586
Michael W. Grasberger 2,443,460 8.04%
2037 Spinnaker Drive
League City, TX 77573
Mark Madamba 90,000 0.296%
Jeffrey Thornton 40,000 0.132%
Douglas Miller 95,105 0.247%
Gobin Sahney N/A N/A
All Officers and
Directors as a group (6) 12,928,734 42.487%
</TABLE>
ITEM 12- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
There have been no material transactions, series of similar transactions,
currently proposed transactions, or a series of similar transactions, to which
the Company or any of its subsidiaries was or is to be a party, in which the
amount involved exceeds $60,000 and in which any director or executive officer
or any security holder who is known to the Company to own of record or
beneficially more than 5% of the Company's common stock or any member of the
immediate family of any of the foregoing persons, had a material interest.
14
<PAGE>
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
Attached
15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Entertainment Technologies and Programs, Inc.
/s/ James D. Butcher
---------------------
By: James D. Butcher, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
- --------- -------- ----
<S> <C> <C>
/s/ James D. Butcher President, Chief Executive March 24, 2000
- ------------------------- Officer and Director (Principal
James D. Butcher Executive Officer)
/s/ Leonida Butcher Director March 24, 2000
- -------------------------
Leonida Butcher
/s/ Mark Madamba Director March 24, 2000
- -------------------------
Mark Madamba
/s/ Jeffrey Thornton Director March 24, 2000
- -------------------------
Jeffrey Thornton
/s/ William Grasberger Secretary March 24, 2000
- ------------------------- and Director
William Grasberger
/s/ Gobin Sahney Director March 24, 2000
- -------------------------
Gobin Sahney
/s/Douglas Miller Director March 24, 2000
- -------------------------
Douglas Miller
</TABLE>
16
<PAGE>
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC. AND SUBSIDIARIES
__________
CONSOLIDATED FINANCIAL STATEMENTS
WITH REPORTS OF INDEPENDENT ACCOUNTANTS
FOR THE YEAR ENDED SEPTEMBER 30, 1999 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1998
F-1
<PAGE>
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
__________
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
Reports of Independent Accountants................................... F-3
Consolidated Financial Statements:
Consolidated Balance Sheet as of September 30,
1999............................................................. F-5
Consolidated Statement of Operations for the
year ended September 30, 1999 and the nine
months ended September 30, 1998.................................. F-6
Consolidated Statement of Cash Flows for the
year ended September 30, 1999 and the nine
months ended September 30, 1998.................................. F-7
Consolidated Statement of Stockholders' Deficit
for the year ended September 30, 1999 and
the nine months ended September 30, 1998......................... F-8
Notes to Consolidated Financial Statements........................... F-9
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and Stockholders of
Entertainment Technologies & Programs, Inc.
We have audited the accompanying consolidated balance sheet of Entertainment
Technologies & Programs, Inc. and Subsidiaries as of September 30, 1999, and the
related consolidated statements of operations, stockholders' deficit and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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 Entertainment
Technologies & Programs, Inc. and Subsidiaries as of September 30, 1999, and the
consolidated results of their operations and their consolidated cash flows for
the year then ended in conformity with generally accepted accounting principles.
As explained in Note 15 to the financial statements, effective October 1, 1998,
the Company changed its method of accounting for start-up costs.
/s/ Ham, Langston & Brezina, L.L.P.
Houston, Texas
December 30, 1999, except for
Note 7, as to which the date
is March 27, 2000
F-3
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and Stockholders of
Entertainment Technologies & Programs, Inc.
We have audited the accompanying consolidated statements of operations,
stockholders' deficit and cash flows of Entertainment Technologies & Programs,
Inc. and Subsidiaries for the nine months ended September 30, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and consolidated
cash flows of Entertainment Technologies & Programs, Inc. and Subsidiaries for
the nine months ended September 30, 1998, in conformity with generally accepted
accounting principles.
/s/ Brian S. Nathanson
Newport Beach, California
January 3, 1999
F-4
<PAGE>
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
ASSETS
- ----------
<S> <C>
Current assets:
Accounts receivable, net $ 441,861
Inventory 92,445
Prepaid expenses 21,681
----------
Total current assets 555,987
Property and equipment, net 4,301,587
Net non-current assets of discontinued
restaurant operations 90,000
Other assets 28,166
----------
Total assets $4,975,740
==========
</TABLE>
LIABILITIES AND STOCKHOLDERS' DEFICIT
- -------------------------------------
<TABLE>
<CAPTION>
Current liabilities:
<S> <C>
Book overdraft $ 36,888
Current maturities of notes payable 1,201,984
Current portion of capital lease obligation 350,487
Accounts payable and accrued liabilities 1,168,481
Accrued phase-out period losses of discontinued
restaurant operations 20,000
-----------
Total current liabilities 2,777,840
Notes payable, net of current maturities 2,600,000
Capital lease obligation, net of current portion 217,943
-----------
Total liabilities 5,595,783
-----------
Commitments and contingencies
Stockholders' deficit:
Common stock, $.001 par value, 50,000,000
shares authorized, 32,734,422 shares
outstanding at September 30, 1999 32,734
Additional paid-in capital 5,663,139
Accumulated deficit (6,165,916)
Treasury stock: 400,000 shares at cost (150,000)
-----------
Total stockholders' deficit (620,043)
-----------
Total liabilities and stockholders'
deficit $ 4,975,740
===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1999 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
-------------- --------------
(AS RESTATED)
<S> <C> <C>
Revenue:
Entertainment services $ 4,208,963 $ 2,965,530
Retail 944,998 514,895
----------- -----------
Total revenue 5,153,961 3,480,425
----------- -----------
Cost of sales and services:
Entertainment services 2,102,550 1,265,411
Retail 783,035 178,027
----------- -----------
Total cost of sales and services 2,885,585 1,443,438
----------- -----------
Gross margin 2,268,376 2,036,987
General and administrative expenses 3,018,379 2,141,509
Depreciation and amortization 877,963 503,930
----------- -----------
Loss from operations (1,627,966) (608,452)
----------- -----------
Other expenses:
Loss on disposal of assets 2,342 --
Interest expense:
Stock issued for interest expense 417,709 60,000
Amortization of loan costs paid by the Company 417,506 --
Interest expense based upon contract rates in loan
agreements 384,488 178,144
----------- -----------
Total interest expense 1,219,703 238,144
----------- -----------
Total other expenses 1,222,045 238,144
----------- -----------
Loss from continuing operations (2,850,011) (846,596)
Discontinued operations:
Gain (loss) from operation of discontinued restaurant
division (510,962) 18,796
Loss on disposal of discontinued restaurant division,
including provision of $125,000 for losses during
the phase-out period (299,364) --
----------- -----------
Loss before cumulative effect of change in accounting
principle (3,660,337) (827,800)
Cumulative effect of change in accounting for start
up expenses (170,611) --
----------- -----------
Net loss $(3,830,948) $ (827,800)
=========== ===========
Basic and diluted net loss per common share:
Continuing operations $ (0.09) $ (0.03)
Discontinued operations (0.02) --
Cumulative effect of change in accounting principle (0.01) --
----------- -----------
Net loss $ (0.12) $ (0.03)
=========== ===========
Weighted average shares outstanding 31,922,657 25,680,714
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED SEPTEMBER 30, 1999 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
-------------- --------------
(AS RESTATED)
<S> <C> <C>
Cash flows from operating activities:
Net loss $(3,830,948) $ (827,800)
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss (gain) from discontinued operations 510,962 (18,796)
Loss on disposal of discontinued operations 299,364 --
Depreciation and amortization 877,963 503,930
Provision for doubtful accounts 4,985 8,015
Loss on disposal of property and equipment 2,342 --
Common stock issued for services 60,400 --
Common stock issued for interest expense 486,000 60,000
Cumulative effect of a change in accounting 110,510 --
Cumulative effect of a change in accounting
related to discontinued operations 60,091 --
Changes in operating assets and liabilities, net
of effects from acquisitions:
Accounts receivable 144,593 (213,406)
Inventory 111,036 (44,623)
Other assets 83,076 32,828
Accounts payable and accrued liabilities 610,873 304,667
----------- -----------
Net cash used in continuing operations (468,753) (195,185)
Net cash provided by (used in) discontinued
operations (444,523) 35,164
----------- -----------
Net cash used in operating activities (913,276) (160,021)
----------- -----------
Cash flows from investing activities:
Capital expenditures (861,142) (2,352,792)
Capital expenditures of discontinued operations (12,799) (420,363)
Proceeds received from sale of property and
equipment 66,561 --
Other -- (115,007)
----------- -----------
Net cash used in investing activities (817,460) (2,888,162)
----------- -----------
Cash flows from financing activities:
Increase in book overdraft 36,888 --
Proceeds from notes payable 2,223,165 524,374
Proceeds from sale of common stock 10,000 2,404,387
Payments on notes payable (352,880) --
Payments on capital lease obligation (53,177) --
Purchase of treasury stock (150,000) --
----------- -----------
Net cash provided by financing activities 1,713,996 2,928,761
----------- -----------
Decrease in cash and cash equivalents (6,740) (119,422)
Cash and cash equivalents, beginning of year 6,740 126,162
----------- -----------
Cash and cash equivalents, end of year $ -- $ 6,740
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest expense $ 887,491 $ 168,144
=========== ==========
Cash paid for income taxes $ -- $ --
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE YEAR ENDED SEPTEMBER 30, 1999 AND THE
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
ADDITIONAL UNISSUED
COMMON STOCK PAID-IN COMMON ACCUMULATED TREASURY
SHARES AMOUNT CAPITAL STOCK DEFICIT STOCK
---------- -------- ---------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 21,886,821 $21,888 $2,653,198 $ -- $(1,507,168) $ --
Net loss for the nine months ended
September 30, 1998, as restated -- -- -- -- (827,800) --
Common stock issuances 8,361,184 8,361 2,396,026 -- -- --
Unissued common stock in connection
with the funding of notes payable -- -- -- 60,000 -- --
---------- -------- ---------- -------- ----------- ---------
Balance at September 30,
1998, as restated 30,248,005 30,249 5,049,224 60,000 (2,334,968) --
Net loss for the year ended
September 30, 1999 (3,830,948) --
Purchase of 400,000 shares of
treasury stock -- -- -- -- (150,000)
Issuance of common stock in con-
nection with the funding of
notes payable 2,050,000 2,050 543,950 (60,000) -- --
Issuance of common stock for cash 66,667 66 9,934 -- -- --
Issuance of common stock for
services 369,750 369 60,031 -- -- --
---------- -------- ---------- -------- ----------- ----------
Balance at September 30, 1999 32,734,422 $32,734 $5,663,139 $ -- $(6,165,916) $(150,000)
========== ======== ========== ======== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------------
BACKGROUND
----------
Entertainment Technologies & Programs, Inc. ("ETP") and its wholly-owned
subsidiaries (the "Company") are engaged in four major areas of operations as
follows:
. Operation of night clubs and other entertainment facilities on United
States military bases throughout the world, including the planning,
promotion and production of live performances at such facilities.
. Design and retail sale of professional sound and lighting equipment to
both the United States military and the non-military consumer markets.
. Design and operation of amusement facilities and equipment.
. Operation of restaurants. (See Note 11)
The accompanying consolidated financial statements include the accounts and
transactions of ETP, along with its wholly-owned subsidiaries. All
intercompany balances and transactions have been eliminated in consolidation.
The consolidated financial statements and notes thereto are presented as if
all mergers and business combinations accounted for as poolings of interest
have operated as one entity since inception.
USE OF ESTIMATES
----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect reported amounts and related disclosures. Actual results could
differ from estimates.
REVENUE RECOGNITION
-------------------
Revenue is recognized at the time services are performed or when products are
shipped.
Continued
F-9
<PAGE>
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
--------------------------------------------------------------------
CONCENTRATIONS OF CREDIT RISK
-----------------------------
Financial instruments which subject the Company to concentrations of credit
risk include cash and accounts receivable. The Company maintains its cash in
well known banks selected based upon management's assessment of the banks'
financial stability. Balances periodically exceed the $100,000 federal
depository insurance limit; however, the Company has not experienced any
losses on deposits. Accounts receivable generally arise from sales of
equipment and services to the United States Government and to United States
consumers. Collateral is generally not required for credit granted. Sales to
the United States government approximate 70% of total sales reported in the
accompanying statements of operations.
CASH EQUIVALENTS
----------------
For purposes of reporting cash flows, the Company considers all short-term
investments with an original maturity of three months or less when purchased
to be cash equivalents.
INVENTORIES
-----------
Inventories, consisting primarily of items available for catalog sales or for
use in the Company's restaurant operations are valued at the lower of cost or
market. Cost is determined based upon the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
----------------------
Property and equipment is stated at cost. Depreciation is computed
principally by the straight-line method over estimated useful lives as
follows:
ESTIMATED
DESCRIPTION USEFUL LIVES
Amusement games 5 years
Furniture and equipment 5-7 years
Club equipment 5-7 years
Leasehold improvements 15 years
Vehicles 5 years
Buildings 39 years
Continued
F-10
<PAGE>
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
--------------------------------------------------------------------
INCOME TAXES
------------
The Company uses the liability method in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and income tax carrying amounts of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
LOSS PER SHARE
--------------
Basic and diluted loss per share is computed on the basis of the weighted
average number of shares of common stock outstanding during each period.
STOCK-BASED COMPENSATION
------------------------
The Company accounts for its stock compensation arrangements under the
provisions of APB No. 25 "Accounting for Stock Issued to Employees". The
Company provides disclosure in accordance with the disclosure-only provisions
of SFAS No. 123 "Accounting for Stock-Based Compensation".
IMPAIRMENT OF LONG-LIVED ASSETS
-------------------------------
In the event that facts and circumstances indicate that the carrying value of
a long-lived asset, including associated intangibles, may be impaired, an
evaluation of recoverability is performed by comparing the estimated future
undiscounted cash flows associated with the asset or the asset's estimated
fair value to the asset's carrying amount to determine if a write-down to
market value or discounted cash flow is required.
FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
The Company includes fair value information in the notes to financial
statements when the fair value of its financial instruments is different from
the book value. When the book value approximates fair value, no additional
disclosure is made.
Continued
F-11
<PAGE>
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
--------------------------------------------------------------------
COMPREHENSIVE INCOME
--------------------
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive Income".
Comprehensive income includes such items as unrealized gains or losses on
certain investment securities and certain foreign currency translation
adjustments. The Company's financial statements include none of the
additional elements that affect comprehensive income. Accordingly,
comprehensive income and net income are identical.
SEGMENT INFORMATION
-------------------
In fiscal year 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". SFAS No. 131 supersedes
SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise".
Under the new standard, the Company is required to use the management
approach to reporting its segments. The management approach designates that
the internal organization that is used by management for making operating
decisions and assessing performance as the source of the Company's segments.
The adoption of SFAS No. 131 had no impact on the Company's net loss, balance
sheet, or stockholders' equity. The accounting policies of the segments are
the same as those described elsewhere in Note 1.
RECLASSIFICATIONS
-----------------
Certain items in these financial statements have been reclassified to conform
to the current period presentation.
2. LIQUIDITY
---------
During the year ended September 30, 1999 and the nine months ended September
30, 1998, the Company has experienced negative financial results as follows:
Continued
F-12
<PAGE>
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C> <C>
2. LIQUIDITY, CONTINUED
--------------------
NINE MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
----------- -----------
(AS RESTATED)
Net loss $(3,830,948) $ (827,780)
Negative cash flows from
operations (913,276) (160,021)
Negative working capital (2,221,853) (768,420)
Accumulated deficit (6,165,916) (2,334,968)
</TABLE>
In addition to negative financial results, the Company has also experienced
operational problems as follows:
. Redfish Management, Inc. ("RMI"), a wholly owned subsidiary of the Company,
filed for Chapter 11 bankruptcy protection to allow the Company to limit
future losses by its restaurant operations (See Note 11).
. The Company has been delinquent on payments of principal for a significant
portion of its note payable and capital lease obligations.
. The Company is in violation of various financial and non-financial covenants
included in certain of its notes payable and capital lease agreements for
which waivers have not been obtained. Accordingly, debt under those
agreements has been classified as current in the accompanying financial
statements (See Note 7 and 10) and could be called by the creditors.
Management has developed specific plans to address its current financial
situation as follows:
. The Company has signed a letter of intent with an investment company under
which the investment company will use its best efforts to raise from $3.0
million to $4.7 million on behalf of the Company. The Company will use the
proceeds from this new debt financing, if received, to repay existing
delinquent debt and to support its continuing operations.
Continued
F-13
<PAGE>
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
2. LIQUIDITY, CONTINUED
--------------------
. The Company has obtained extensions on the maturity of its Investor Notes
(See note 7) to October 1, 2000.
. The Company has adopted plans to discontinue its restaurant operations
because those operations require significant amounts of debt financing and
have contributed significantly to the Company's financial problems.
Seeking Chapter 11 bankruptcy for Redfish Management, Inc. was a step
necessary to allow the Company to eliminate those operations without
increasing risk to its more profitable operations.
Management of the Company believes that with the extension of its Investor
Notes and with its current business plans that it will ultimately achieve
adequate profitability and cash flow from operations in order to meet its
current obligations and fund the continuation of its business operations.
3. PRIOR PERIOD ADJUSTMENTS
------------------------
During the nine months ended September 30, 1998 there was an error in the
recording of certain accrued liabilities and a note payable to an individual.
Additionally, the Company did not properly value shares of its common stock
issued in connection with the funding of certain notes payable. The effect
of correcting these errors in application of generally accepted accounting
principles on the Company's financial statements as of and for the nine
months ended September 30, 1998 is as follows:
Increase in total liabilities $246,677
========
Increase in additional paid-in capital $ 60,000
========
Increase in accumulated deficit $306,677
========
Increase in net loss $306,677
========
Increase in net loss per common share $ 0.01
========
Continued
F-14
<PAGE>
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
4. BUSINESS COMBINATIONS
---------------------
In June 1998 the Company acquired Waterpark Wonderland, Inc. in Midland
County, Texas. This acquisition has been accounted for using the purchase
method of accounting and the results of operations of Waterpark Wonderland,
Inc. have been consolidated with the Company's since the date of the
acquisition.
The $881,653 purchase price has been allocated to the assets acquired based
on cash paid of $131,653 and the quoted market value of the 2,000,000 shares
of the Company's common stock exchanged for the assets of Waterpark
Wonderland, Inc.
The following unaudited summary proforma information presents the
consolidated results of operations as if the effective date of the
acquisition occurred at the beginning of 1998 after giving effect to certain
adjustments which include increased depreciation expense and the additional
common shares outstanding as a result of the acquisition.
NINE MONTHS
ENDED
SEPTEMBER 30,
1998
-------------
Entertainment service revenue $4,626,988
Loss before extraordinary item (832,107)
Net loss (832,107)
Net loss available to common stockholders (832,107)
Basic and dilutive net loss per common
share (0.03)
In March 1998, the Company entered into two merger transactions accounted for
as poolings of interests. Under the terms of the pooling transactions, the
Company exchanged a total of 2,850,000 shares of its common stock for 100% of
the outstanding common stock of Hero's Family Fun Entertainment, Inc. in
Pasadena, Texas and for 100% of the outstanding common stock of Chacho's,
Inc. in Houston, Texas.
Continued
F-15
<PAGE>
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
5. ACCOUNTS RECEIVABLE
-------------------
Accounts receivable consist primarily of amounts due from U.S. military bases
for the purchase of entertainment equipment and services. An allowance for
doubtful accounts is provided, when appropriate, based on past experience and
other factors which, in management's judgment, deserve current recognition in
estimating probable bad debts. Such factors include circumstances with
respect to specific accounts receivable, growth and composition of accounts
receivable, the relationship of the allowance for doubtful accounts to
accounts receivable and current economic conditions. Accounts receivable at
September 30, 1999 are stated net of an allowance for doubtful accounts of
$17,985.
6. PROPERTY AND EQUIPMENT
----------------------
Property and equipment consisted of the following at September 30, 1999 and
1998:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Land $ 913,485 $ 913,485
Buildings and improvements 1,626,405 1,557,101
Club equipment 2,237,255 2,674,754
Amusement games 1,991,374 2,207,926
Furniture and equipment 351,702 363,206
Vehicles 115,151 115,151
----------- -----------
7,235,372 7,831,623
Less: accumulated depreciation
and amortization (2,933,785) (2,930,797)
----------- -----------
Property and equipment, net $ 4,301,587 $ 4,900,826
=========== ===========
</TABLE>
Depreciation expense for the year ended September 30, 1999 and the nine
months ended September 30, 1998 was $920,589 and $520,298, respectively.
Continued
F-16
<PAGE>
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
7. NOTES PAYABLE
-------------
Notes payable consist of the following at September 30, 1999:
Note payable to a bank (the "SBA Loan"),
bearing interest of 11.0% per year and
due in monthly payments of $5,928,
including interest, through November
2016. This note is guaranteed by the
United States Small Business Adminis-
tration ("SBA") and is collateralized
by certain real estate and by the per-
sonal guarantee of an officer/stock-
holder of the Company. $ 528,472
Notes payable to investors (the "Investor
Notes") under private placements handled
by an investment company. These notes
bear interest at stated rates ranging
from 12.0% to 14.0% per year and are
collateralized by substantially all
assets of the Company. In connection
with the funding of the Investor Notes,
the Company issued a total of 2,050,000
shares of its common stock and paid loan
costs of approximately $420,000. Accord-
ingly, the actual weighted average int-
erest rate on these notes, including the
effect of the issuance of common stock and
the payment of loan costs, approximated
61% during the year ended September 30,
1999. 2,600,000
Notes payable to individuals, due on
demand, bearing interest at various
rates up to 10% per year. These
notes are not collateralized. 329,924
Note payable to a factoring company,
bearing interest at graduated rates
based upon the collection period
for factored receivables. 268,588
Note payable to a bank, bearing interest
of 13.25% per year and due on demand.
This note is not collateralized. 75,000
-----------
Total notes payable 3,801,984
Less current maturities (1,201,984)
-----------
Total notes payable, net of current
maturities $ 2,600,000
===========
Continued
F-17
<PAGE>
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
7. NOTES PAYABLE, CONTINUED
------------------------
The SBA Loan, contains various financial and non-financial covenants, which
require the Company, among other things, to maintain certain levels of cash
flows, stockholders' equity and debt to equity. The covenants also prohibit,
without the consent of the lender, the Company from making material changes
to its business, declaring or paying dividends, transferring ownership
interests in the Company, paying salaries to certain officers of the Company
in excess of specified limits, or incurring new debt. The Company is in
violation of many of the covenants of the SBA Loan. Accordingly, the SBA
Loan could be called at any time by the lender. The Company has not
requested or received covenant violation waivers from the lender and the SBA
Loan has been classified as current in the financial statements.
The Investor Notes consist of five notes in face values of $200,000 to
$600,000. The investment company arranged for funding of the Investor Notes
using two methods. Two of the notes with a total face value of $1,200,000
were placed in unit trusts in which investors acquired interest in $1,000
units. The remaining $1,400,000 was funded through the sale of undivided
interests in three notes. The Company, in order to secure the funding under
Investor Notes issued a total of 2,050,000 shares of its common stock to the
investors and the investment company. The issuance of those shares resulted
in the Company recognizing $60,000 of additional interest expense in 1998 and
$486,000 in 1999. The Company also incurred loan costs in connection with
the Investor Notes of approximately $420,000 in the form of legal fees,
accounting fees, commissions and other directly related costs.
The Investor Notes contain certain covenants that require, among other
things, that the Company make all payments under the notes when due,
experience no significant change in its financial condition or be the subject
of any bankruptcy proceedings (See Note 2). The Company was in violation of
certain covenants under the Investor Notes. However, effective March 27,
2000, the Company received an extension of the maturity of its Investor Notes
to October 1, 2000. In connection with this extension the Company has agreed
to: (1) pay the note holders a 2% extension fee; (2) issue them an
additional 380,000 shares of restricted common stock; and (3) give them the
option to receive the 2% extension fee, delinquent interest payments and late
fees, and future interest payments through October 1, 2000, in either cash or
the Company's restricted common stock at a conversion price of 10.5 cents per
share.
Continued
F-18
<PAGE>
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
-----------------------------------------
Accounts payable and accrued liabilities consisted of the following at
September 30, 1999:
<TABLE>
<CAPTION>
<S> <C>
Accounts payable, trade $718,904
Accrued payroll 103,641
Accrued rent expense 69,820
Payroll taxes payable 58,245
Accrued interest expense 56,118
Sales taxes payable 17,545
Accrued property tax expense 65,788
Other accrued expenses 78,420
--------
</TABLE>
$1,168,481
==========
9. INCOME TAXES
------------
The Company has incurred losses since its inception and, therefore, has not
been subject to federal income taxes. As of September 30, 1999, the Company
had net operating loss ("NOL") carryforwards for income tax purposes of
approximately $6,000,000 which expire in various years through 2019. Under
the provisions of Section 382 of the Internal Revenue Code the greater than
50% ownership change in the Company that could result from the debt agreement
with an investment company could severely limit the Company's ability to
utilize its NOL carryforward to reduce future taxable income and related tax
liabilities. Additionally, because United States tax laws limit the time
during which NOL carryforwards may be applied against future taxable income,
the Company may be unable to take full advantage of its NOL for federal
income tax purposes should the Company generate taxable income.
The composition of deferred tax assets and liabilities and the related tax
effects at September 30, 1999 are as follows:
Continued
F-19
<PAGE>
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
9. INCOME TAXES, CONTINUED
-----------------------
Deferred tax assets:
Net operating losses $ 2,040,489
Other asset basis difference 46,406
Accrued liabilities and reserves 21,203
Accrued loss on disposal of discontinued
operations 101,784
Valuation allowance (2,101,571)
-----------
Total deferred tax assets 108,311
-----------
Deferred tax liabilities:
Property and equipment (108,311)
----------
Total deferred tax liability (108,311)
----------
Net deferred tax asset (liability) $ --
==========
</TABLE>
The difference between the income tax benefit in the accompanying statement
of operations and the amount that would result if the U.S. Federal statutory
rate of 34% were applied to pre-tax loss is as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------------------- ----------------------
AMOUNT % AMOUNT %
-------------- -------- ----------- --------
(AS RESTATED)
<S> <C> <C> <C> <C>
Benefit for income tax at
federal statutory rate $(1,302,522) (34.00)% $(281,452) (34.00)%
Difference in depreciation 50,266 1.32 (64,104) (7.74)
Difference in amortization
of start-up costs 46,406 1.22 9,754 1.18
Difference in recognition
of accrued expenses 21,203 0.56 -- --
Difference in recognition of
accrued loss on disposal of
discontinued operations 101,784 2.65 -- --
Difference in gain on sale
of asset 7,565 0.19 (9,298) (1.12)
Non-deductible expenses 2,119 0.05 1,694 0.20
Increase in valuation
allowance 1,073,179 28.01 343,406 41.48
----------- ------- --------- -------
$ -- 0.00% $ -- 0.00%
============= ======= ========== =======
</TABLE>
Continued
F-20
<PAGE>
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
10. LEASE OBLIGATIONS
-----------------
Included in property and equipment in the accompanying consolidated balance
sheet at September 30, 1999 are the following assets held under a capital
lease:
Amusement games $ 700,000
Accumulated amortization (163,333)
----------
Assets under capital leases, net $ 536,667
==========
The Company has also entered into certain operating leases for offices and
restaurants. Certain of the leases provide for renewal options, payment of
taxes and utilities by the Company, and increases to rent should certain
costs to the landlord increase. Rental expense under operating leases was
$423,013 and $216,420 during the year ended September 30, 1999 and the nine
months ended September 30, 1998, respectively.
Minimum lease payments due under leases with original lease terms of greater
than one year and expiration dates subsequent to September 30, 1999 are
summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED CAPITAL OPERATING
SEPTEMBER 30, LEASE LEASES
------------- --------- ---------
<S> <C> <C>
2000 $ 437,127 $ 237,369
2001 230,067 178,691
2002 -- 86,049
-------- --------
Total minimum leases 667,194 $ 502,109
========
Less amount representing interest 98,764
--------
Present value of minimum lease
payments 568,430
Less current portion 350,487
--------
</TABLE>
$ 217,943
=========
Continued
F-21
<PAGE>
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
10. LEASE OBLIGATIONS, CONTINUED
----------------------------
The capital lease agreement includes certain covenants that require the
Company to provide various financial information to the lessor in a timely
manner. During the year ended September 30, 1999, the Company did not comply
with the lease covenants and at September 30, 1999, the Company was six
months past due on required payments of the lease obligation. Accordingly,
the Company is in default of the lease agreement and the lessor could
repossess the amusement games or request payment of past due amounts. If the
lessor requested payment of past due amounts and the Company was unable to
comply, the lessor's only recourse is repossession of the leased amusement
games. The Company has not requested or received any waiver of covenant
violations and its present financial circumstances prevent the Company from
making past due lease payments.
11. DISCONTINUED OPERATIONS
-----------------------
On September 15, 1999, the Company adopted a plan to dispose of all
restaurant operations. The Company's restaurant operations are conducted
through the its wholly owned subsidiary, Redfish Management, Inc. ("RMI").
As part of the Company's plan, RMI sought Chapter 11 federal bankruptcy
protection in November 1999 (See Note 2) and began an effort to sell all
assets of RMI.
Based on discussions with prospective buyers of RMI's assets, the Company
recognized an estimated loss on disposal of RMI's assets of $279,364 at
September 30, 1999. The Company has also recorded a $20,000 provision for
losses from continued operation of its restaurants to the date of disposal.
Management expects to complete disposition of RMI's assets by January 31,
2000.
The gain (loss) from operation of the discontinued restaurant division
presented in the accompanying statements of operations includes the
following:
Continued
F-22
<PAGE>
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
11. DISCONTINUED OPERATIONS, CONTINUED
----------------------------------
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
-------------- -------------
<S> <C> <C>
Net sales $1,607,613 $1,275,075
Gain (loss) from operations (316,992) 18,796
Gain (loss) from discontinued
operations (510,962) 18,796
Net non-current assets of discontinued restaurant operations consist of the
following at September 30, 1999:
Leasehold improvements $ 332,239
Furniture and equipment 116,856
---------
449,095
Less accumulated depreciation (95,892)
---------
353,203
Lease deposits 16,161
---------
Total 369,364
Less estimated provision for loss on
disposal (279,364)
---------
Net non-current assets of discontinued
restaurant operations $ 90,000
=========
</TABLE>
Continued
F-23
<PAGE>
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
12. CONTINGENCIES
-------------
During October 1999, the Company abandoned certain lease space in a shopping
mall in Arlington, Texas before the expiration of the lease term. Management
abandoned the lease because management believed that the lessor improperly
induced the Company to enter the lease through misrepresentations about the
ability of the shopping mall to support the amusement services offered by the
Company. In January 1999, the lessor filed a lawsuit against the Company
seeking damages of $124,727 for breach of lease. Although the Company
believes that the lawsuit will be won or settled for much less than the
amount sought by the lessor, the Company has recorded an accrual of $62,364
at September 30, 1999.
As described in Note 2 to the financial statements, on November 16, 1999,
RMI, a wholly-owned subsidiary that includes all of the Company's
restaurants, filed for bankruptcy protection under Chapter 11 of the U.S.
Bankruptcy Code. In connection with the bankruptcy filing, the Company's
plan of reorganization is based upon a planned sale of all assets of RMI and
use of the proceeds for payment of creditors. At September 30, 1999 the
Company has treated the operations of RMI as a discontinued business segment
and written the related assets down to their estimated net realizable values
(See Note 11). There can be no assurance that the Company's plan of
reorganization will be successful or that the $90,000 estimated liquidation
value of the assets of RMI will be realized.
The Company is currently a party to certain other litigation arising in the
normal course of business. Management believes that such litigation will not
have a material impact on the Company.
13. BUSINESS SEGMENTS
-----------------
During the fiscal year ended September 30, 1999 and the nine months ended
September 30, 1998, the Company operated primarily in four strategic business
units that offer different products and services: providing military
entertainment services, retail sale of sound and lighting equipment, design
and operation of amusement facilities and equipment, and operation of
restaurants. Restaurant operations have not been included in segment
information since they were reported as discontinued operations (See Note
11). Financial information regarding the other business segments is as
follows:
Continued
F-24
<PAGE>
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
13. BUSINESS SEGMENTS, CONTINUED
----------------------------
<TABLE>
<CAPTION>
MILITARY RETAIL AMUSE-
ENTERTAINMENT SALES MENT OTHER TOTAL
-------------- ------- -------- ------ --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30,
1999:
Revenues $3,309 $ 945 $ 857 $ 43 $ 5,154
Income (loss) from oper-
ations (197) (166) (1,107) (157) (1,627)
Total assets 1,413 272 3,256 35 4,976
Interest expense 38 35 1,021 126 1,220
Depreciation expense 383 1 484 10 878
Effect of change in
accounting -- -- 111 -- 111
Capital expenditures 337 2 497 25 861
NINE MONTHS ENDED
SEPTEMBER 30, 1998 (AS
RESTATED):
Revenues $2,362 $ 515 $ 603 $ -- $ 3,480
Income (loss) from op-
erations 225 92 (520) (405) (608)
Total assets 1,585 402 3,539 -- 5,526
Interest expense 5 5 145 83 238
Depreciation and
amortization expense 230 5 210 59 504
Capital expenditures 267 2 2,070 14 2,353
</TABLE>
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. All intersegment sale prices
are market based. The Company evaluates performance based on operating
earnings of the respective business units.
14. NON-CASH FINANCING AND INVESTING ACTIVITY
-----------------------------------------
During the year ended September 30, 1999, the Company sold certain equipment
in exchange for the buyer's assumption of a $130,565 directly related note
payable.
Continued
F-25
<PAGE>
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
15. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
---------------------------------------------------
Effective October 1, 1998, the Company, in accordance with the American
Institute of Certified Public Accountants' Statement of Position 98-5,
changed its method of accounting for start-up costs. The change involved
expensing these costs as incurred, rather than capitalizing and subsequently
amortizing such costs. The change in accounting principle resulted in the
write-off of the costs capitalized as of October 1, 1998. The cumulative
effect of the write-off, which totals $170,611, has been expensed and
included in the accompanying 1999 consolidated statement of operations. The
effect of adopting this change in accounting principle for the year ended
September 30, 1999 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Loss from continuing operations $110,520
Net loss per share from continuing
operations 0.01
Loss from discontinued operations 60,091
Net loss per share from discontinued
operations 0.00
Net loss 170,611
Net loss per share 0.01
</TABLE>
F-26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 441,861
<ALLOWANCES> 0
<INVENTORY> 92,445
<CURRENT-ASSETS> 555,987
<PP&E> 4,301,587
<DEPRECIATION> 920,589
<TOTAL-ASSETS> 4,975,740
<CURRENT-LIABILITIES> 2,777,840
<BONDS> 0
0
0
<COMMON> 32,734
<OTHER-SE> (652,777)
<TOTAL-LIABILITY-AND-EQUITY> 4,975,740
<SALES> 5,153,961
<TOTAL-REVENUES> 5,153,961
<CGS> 2,885,585
<TOTAL-COSTS> 6,781,927
<OTHER-EXPENSES> 2,342
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,219,703
<INCOME-PRETAX> (3,830,948)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,850,011)
<DISCONTINUED> (810,326)
<EXTRAORDINARY> 0
<CHANGES> (170,611)
<NET-INCOME> (3,830,948)
<EPS-BASIC> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
