<PAGE>
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, 2000.
( ) 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.
-------------------------------------------
(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
----------------------------------------------------
(Address of principal executive office) (Zip Code)
(281) 486-6115
--------------
(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, 2000 as reported on the NASDAQ Electronic Bulletin Board, was
$4,569,423. 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, 2000 totaled $4,817,594
As of September 30, 2000, Registrant had outstanding shares of Common Stock of
41,540,211.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
Transitional Small Business Disclosure Format Yes ( ) No (X)
1
<PAGE>
ENTERTAINMENT TECHNOLOGIES AND PROGRAMS, INC.
ANNUAL REPORT ON FORM 10-KSB
SEPTEMBER 30, 2000
TABLE OF CONTENTS
PART I
<TABLE>
<CAPTION>
<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 9
Item 6 Management's Discussion and Analysis 9
Item 7 Financial Statements 11
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 Financial Disclosure 11
PART III
Item 9 Directors, Executive Officers, Promoters and
Control Persons: 12
Compliance with Section 16(a) of the exchange Act
Item 10 Executive Compensation 13
Item 11 Security Ownership of Certain Beneficial Owners
and Management 14
Item 12 Certain Relationships and Related Transactions 14
Item 13 Exhibits and Reports on Form 8-K 15
</TABLE>
2
<PAGE>
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
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 largest individual 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 the operation of a water park.
3
<PAGE>
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 43
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.
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 continue
to reduce the total number of military installations that remain open
and possibly limit the future growth of NiteLife.
. 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 general corporate overhead.
. The assets of NiteLife Entertainment might be used in a 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
<PAGE>
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. This center will be located in
Channelview, Texas and is scheduled to open in February 2001. This center will
operate attractions designed to fit local demographics; however, the facility
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. (See DEBT REDUCTION PLAN)
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
5
<PAGE>
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.
. This division depends on large amounts of capital to complete and finish
projects that are currently in process.
EMPLOYEES
As of September 30, 2000, the Company had approximately 57 employees, of
which 19 are full time and 38 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.
<TABLE>
<CAPTION>
Company Number of Employees
------- -------------------
<S> <C>
Entertainment Technologies & Programs, Inc. 6
Performance Sound & Light, Inc. 4
NiteLife Military Entertainment, Inc. 6
Stargate Entertainment, Inc. 41 Some seasonally
</TABLE>
GENERAL RISKS ASSOCIATED WITH BUSINESS ACTIVITIES
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. 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
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
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 could 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.
In order to address the Company's dependence on Mr. Butcher in 2000, the
Company took steps to strengthen its management team including the addition of
an experienced chief financial officer and controller.
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.
6
<PAGE>
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 23.48% and 5.40% 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.
No Dividends
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
$1,330.20 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 water park, 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.
Hero's Entertainment - Channelview leases 8,251 square feet from Taranito
Properties at a monthly rate of $4,290. The lease expires on May 31, 2002.
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; 236/th/ Judicial District
This is a case founded on a lease agreement for retail space in the
Parks at Arlington shopping mall located at Arlington, Texas. The
initial suit filed against the corporation sought $124,727.21 in damages
plus applicable interest and attorney's fees. The case went to mediation
and an agreement was reached as to a settlement amount. $67,500.00
remains to be paid under the agreement reached. Management intends to
fulfill the corporation obligations under the agreement reached.
2. No. DV99-025444-j; Entertainment Technologies & Programs, Inc. vs.
Bronco Group, Mgt., Inc. and Bowling & Billiard Supply Company,
Inc.; 191/st/ Judicial District Court; Dallas County, Texas
This is a breach of contract and tortuous interference with a business
relationship case. Entertainment Technologies & Programs, Inc. entered
into a contract with Bronco Group Management, Inc. concerning the
installation of video games at a location provided by Bronco Group
Management, Inc. Thereafter, Bowling & Billiard Supplies Company, Inc.
approached Bronco and induced them to breach their contract with ETP,
Inc. The corporation brought suit against Bronco Group Management, Inc.
for breach of contract and against Bowling & Billiard Supplies, Inc. for
tortuous interference with the business relationship between ETP, Inc.
and Bronco. The contract between ETP, Inc. and Bronco contained a
mandatory binding arbitration clause. Arbitration resulted in a judgment
being entered against Bronco for breach of contract in the sum of
$339,878.00. The corporation has filed its pleading seeking a severance
of the two causes of action to make the judgment against Bronco a final
judgment and shall continue its case against Billiard for
7
<PAGE>
tortuous interference with a business relationship. Management has
aggressively pursued this case and a favorable outcome and recovery in
excess of $250,000.00 against Billiard is, in our opinion, probable.
3. 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; 190/th/
Judicial District
This case is founded on an alleged breach of contract between the
plaintiff and Hero's Family Fun Entertainment, Inc., a wholly owned
subsidiary of Entertainment Technologies & Programs, Inc. The relevant
contract has a liquidated damage clause which if enforced would limit
the damage recovery obtained by the plaintiff to less than $10,000.00.
The damage calculation is based on profit lost by the plaintiff and as
the evidence currently stands the plaintiff may be unable to prove any
loss of profit. With a good jury a favorable result is expected in the
trial of this case. Management has strongly defended this suit.
4. No. 740958; Jim Drury and Debbie Drury vs. Entertainment Technologies
& Programs, Inc.; In the County Court at Law Number Four (4) of
Harris County, Texas
This suit is founded on a certain Promissory Note dated May 5, 1998,
payable to the plaintiffs in the sum of $38,758.00 which currently has
an alleged outstanding balance of $23,689.66. A legal response has been
filed on behalf of the corporation in addition to a cross-action by the
corporation against the plaintiffs in the sum of $11,843.59, plus
necessary and reasonable attorney's fees. The case currently is in the
initial stages of pre-trial discovery with an anticipated trial date in
2002. Management is responding to the litigation vigorously and a
favorable outcome is expected with little or no financial exposure to
the corporation.
5. No. H-00-1966; Wanna Get Fresh, Inc. vs. Entertainment Technologies &
Programs, Inc., et al; In the United States District Court for the
Southern District of Texas; Houston Division
This case is founded on an alleged trademark infringement. The
corporation was one of several defendants named in the suit. My analysis
of the facts as currently revealed is that if in fact there has been a
trademark infringement and damages sustained by the plaintiff as a
result of such infringement one or more of the other co-defendants are
the responsible parties. The Company has little or no financial exposure
to the corporation in this case and the management of the corporation is
responding to the litigation in a vigorous manner.
6. No. 348-177552-99; Jason Neil Young vs. Entertainment Technologies &
Programs, Inc., et al; In the District Court of Tarrant County,
Texas; 348th Judicial District
This is a case founded on an alleged on-the-job personal injury. The
case is set for trial January 16, 2001. Management has aggressively
defended this suit primarily because the evidence strongly suggests that
the plaintiff has filed an unjust claim. The Company settled this case
January 11, 2001 and will pay $13,655.57 over the next 5 months.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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.
8
<PAGE>
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Absence of Public Market: Instability of Stock Price
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,
41,540,211 shares of the Company's common stock are outstanding 27,301,271 of
which are designated as "restricted securities." Of this amount, 14,238,940
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.
The following table sets forth the reported high and low closing bid
quotations for our common stock. The bid prices reflect inter-dealer
quotations, do not include retail mark-ups, markdowns or commissions and do not
necessarily reflect actual transactions.
<TABLE>
<CAPTION>
COMMON
NON-NASDAQ OTC:
QUARTER ENDED HIGH BID LOW BID
--------------------- -------- -------
<S> <C> <C>
December 31, 1998 $.63 $.13
March 31, 1999 .82 .21
June 30, 1999 .34 .13
September 30, 1999 .49 .12
December 31, 1999 .24 .12
March 31, 2000 .43 .12
June 30, 2000 .31 .11
September 30, 2000 .23 .08
</TABLE>
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
Revenues for the year ended September 30, 2000, decreased $336,367 or 6.5%
to $4,817,594 from $5,153,961 for the year ended September 30, 1999. This
decrease was due to decreased revenues in PS&L and the slightly weaker
performance by the Company's entertainment centers. NiteLife's revenues
remained flat during 2000 and accounted for 69% of total revenues.
Gross margin for the year ended September 30, 2000, increased $94,932 or
4.2% to $2,363,308 from $2,268,376 for the year ended September 30, 1999. This
increase was due to the elimination of the high costs associated with the
initial year operations of Hero's Waterworld.
9
<PAGE>
General and administrative expenses for the year ended September 30, 2000,
increased $48,824 or 2.0% to $3,067,203 from $3,018,379 for the year ended
September 30, 1999. This increase is generally attributable to normal increases
in costs as a result of inflationary trends.
Depreciation expense for the year ended September 30, 2000, decreased
$146,742 or 16.7% to $731,221 from $877,963 for the year ended September 30,
1999. The decrease is due to reduced installation of sound and lighting
equipment and full depreciation of certain assets added in earlier years.
Interest expense decreased $454,583 to $765,120 for the year ended
September 30, 2000, from $1,219,703 for the year ended September 30, 1999. The
decrease is due to the elimination of certain one-time 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 years ended September 30, 2000 and 1999, the Company has
experienced negative financial results as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- -------------
<S> <C> <C>
Net loss $(2,226,489) $(3,830,948)
Negative cash flows from operations (403,055) (913,276)
Negative working capital (5,369,776) (2,221,853)
Accumulated deficit (8,392,405) (6,165,916)
</TABLE>
In addition to negative financial results, the Company has also experienced
operational problems as follows:
. In 1999 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.
. At September 30, 2000 and 1999, the Company has been delinquent on
payments of principal for a significant portion of its note payable and
capital lease obligations. The Company has also been in violation of
various financial and non-financial covenants included in various 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 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.
. The Company is currently in the final stages of a debt reduction plan to
exchange certain of its assets to repay approximately $2,900,000 of long-
term debt and related accrued interest.
10
<PAGE>
As a result of these potential liquidity problems, our auditors, Ham,
Langston & Brezina, L.L.P., have added an explanatory paragraph in their opinion
on our financial statements for the year ended September 30, 2000, indicating
that substantial doubt exists about our ability to continue as a going concern.
Management of the Company believes that with the debt reduction plan of its
Investor Notes and with additional depth to the management team and a focus on
its core business 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, 2000 and 1999, 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 41 Chairman of the Board and CEO
Leonida Butcher 42 Director
William M. Grasberger 46 Secretary and Director
Mark Madamba 38 Director
Gobind Sahney 38 Director
Douglas Miller 37 Director
George C. Woods 42 Chief Financial Officer
</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.
GEORGE C. WOODS, Chief Financial Officer, has been with the Company since
June 2000. Mr. Woods has considerable experience in consolidation transactions,
capital formation, IPO's and mergers and acquisitions. Most recently, Mr. Woods
was Vice President-Finance of Fallright America, L.L.C., where he obtained
capital for growth and provided monetization of existing shareholder equity.
Prior to joining Fallright, Mr. Woods was a co-founder and principal of WJG
Capital, L.L.C., a Houston, Texas-based limited liability company dedicated to
identifying consolidation opportunities in highly fragmented industries. WJG
Capital funded Nationwide Staffing Services, Inc., a consolidation company in
the staffing industry. WJG Capital assisted Nationwide with the simultaneous
merger of eight founding companies and the filing of its initial public offering
registration statement to be listed on the New York Stock Exchange. From 1987 to
1996, Mr. Woods held senior financial and accounting positions at Quality Tubing
at which he was the Chief Financial Officer, Vice President-Finance and
Administration. From 1982 to 1987, he was the Corporate Controller and Treasurer
of Paragon Industries, a privately-owned manufacturing division of the WEDGE
Group, Inc. a private company developing consolidations in numerous industries.
Mr. Woods is a graduate of the University of Texas with a B.B.A. in Finance and
earned an MBA from the University of Houston.
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
12
<PAGE>
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.
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 2000 $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
13
<PAGE>
Advisory Committee. The Agreement may be terminated upon death, disability or
for "just cause" (as defined therein).
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, 2000, 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 & 9,803,058 23.60%
Leonida Butcher
480 Kirby Rd.
Seabrook, TX 77586
Michael W. Grasberger 2,243,460 5.40%
2037 Spinnaker Drive
League City, TX 77573
Mark Madamba 155,000 0.38%
Douglas Miller 118,105 0.29%
Gobin Sahney N/A N/A
George Woods 100,000 0.23%
All Officers and
Directors as a group (6) 12,419,623 29.90%
</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
None
(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 January 16, 2001
------------------------- Officer and Director
James D. Butcher (Principal Executive Officer)
/s/ Leonida Butcher Director January 16, 2001
-------------------------
Leonida Butcher
/s/ Mark Madamba Director January 16, 2001
-------------------------
Mark Madamba
/s/ William Grasberger Secretary and Director January 16, 2001
-------------------------
William Grasberger
/s/ Gobin Sahney Director January 16, 2001
-------------------------
Gobin Sahney
/s/Douglas Miller Director January 16, 2001
-------------------------
Douglas Miller
/s/ George C. Woods Chief Financial Officer January 16, 2001
-------------------------
George C. Woods
</TABLE>
16
<PAGE>
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC.
__________
CONSOLIDATED FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT ACCOUNTANTS
FOR THE YEARS ENDED SEPTEMBER 30, 2000 AND 1999
F-1
<PAGE>
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC.
TABLE OF CONTENTS
PAGE(S)
-------
Report of Independent Accountants F-3
Consolidated Financial Statements:
Consolidated Balance Sheet as of September 30,
2000 F-4
Consolidated Statements of Operations for the
years ended September 30, 1999 and 2000 F-5
Consolidated Statements of Cash Flows for the
years ended September 30, 1999 and 2000 F-6
Consolidated Statements of Stockholders' Deficit
for the years ended September 30, 1999 and 2000 F-7
Notes to Consolidated Financial Statements F-8
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 its subsidiaries (collectively, the "Company")
as of September 30, 2000, and the related consolidated statements of operations,
stockholders' deficit and cash flows for each of the two years in the period
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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Entertainment Technologies &
Programs, Inc. and subsidiaries as of September 30, 2000, and the results of
their operations and their cash flows for each of the two years in the period
then ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 2 to the financial
statements, the Company has suffered recurring losses from operations and at
September 30, 2000 is in a negative working capital position and stockholders'
deficit position. These factors raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
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, 2000, except
for Note 3, as to which the
date is January 16, 2001
F-3
<PAGE>
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2000
---------------
<TABLE>
<CAPTION>
UNAUDITED
PROFORMA
ASSETS ACTUAL (NOTE 3)
------ ---------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 9,604 $ 9,604
Accounts receivable, net 300,353 300,353
Inventory 92,729 92,729
Restricted cash 54,210 54,210
----------- -----------
Total current assets 456,896 456,896
Property and equipment, net 3,894,443 1,937,093
Other assets 28,091 28,091
----------- -----------
Total assets $ 4,379,430 $ 2,422,080
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current liabilities:
Current maturities of notes payable $ 3,736,002 $ 1,136,002
Current portion of capital lease obligations 568,430 568,430
Accounts payable and accrued liabilities 1,512,536 1,313,738
Accrued phase-out period losses of discontinued
restaurant operations 82,832 82,832
----------- -----------
Total current liabilities 5,899,800 3,101,002
Capital lease obligations, net of current portion 400,000 400,000
----------- -----------
Total liabilities 6,299,800 3,501,002
----------- -----------
Commitments and contingencies
Stockholders' deficit:
Common stock, $.001 par value, 50,000,000
shares authorized, 41,540,211 (45,734,620
proforma) shares issued and 41,140,211
(45,334,620 proforma) shares outstanding
at September 30, 2000 41,540 45,334
Additional paid-in capital 6,580,495 7,038,086
Accumulated deficit (8,392,405) (8,012,342)
Treasury stock, 400,000 shares at cost (150,000) (150,000)
----------- -----------
Total stockholders' deficit (1,920,370) (1,078,922)
----------- -----------
Total liabilities and stockholders'
deficit $ 4,379,430 $ 2,422,080
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 2000
<TABLE>
<CAPTION>
UNAUDITED
ACTUAL PROFORMA
-------------------------- 2000
1999 2000 (NOTE 3)
----------- ----------- -----------
<S> <C> <C> <C>
Revenue:
Entertainment services $ 4,208,963 $ 4,048,720 $ 3,570,739
Retail 944,998 768,874 768,874
----------- ----------- -----------
Total revenue 5,153,961 4,817,594 4,339,613
----------- ----------- -----------
Cost of sales and services:
Entertainment services 2,102,550 2,087,329 2,028,283
Retail 783,035 366,957 366,957
----------- ----------- -----------
Total cost of sales and services 2,885,585 2,454,286 2,395,240
----------- ----------- -----------
Gross margin 2,268,376 2,363,308 1,944,373
General and administrative expenses 3,018,379 3,067,203 2,620,803
Depreciation and amortization expense 877,963 731,221 683,418
----------- ----------- -----------
Loss from operations (1,627,966) (1,435,116) (1,359,848)
----------- ----------- -----------
Other income (expenses):
Gain (loss) on disposal of assets (2,342) - 348,798
Interest expense (1,219,703) (765,120) (304,529)
----------- ----------- -----------
Total other income (expenses) (1,222,045) (765,120) 44,269
----------- ----------- -----------
Loss from continuing operations (2,850,011) (2,200,236) (1,315,179)
Discontinued operations:
Loss from operation of discontinued
restaurant division (510,962) - -
Loss on disposal of discontinued restaurant
division, including provision for losses
during the phase-out period (299,364) (26,253) (26,253)
----------- ----------- -----------
Loss before cumulative effect of change in
accounting principle (3,660,337) (2,226,489) (1,341,432)
Cumulative effect of change in accounting for
start up expenses (170,611) - -
----------- ----------- -----------
Net loss $(3,830,948) $(2,226,489) $(1,341,432)
=========== =========== ===========
Basic and diluted net loss per common share:
Continuing operations $ (0.09) $(0.06) $(0.03)
Discontinued operations (0.02) - -
Cumulative effect of change in accounting
principle (0.01) - -
----------- ----------- -----------
Net loss $ (0.12) $(0.06) $(0.03)
=========== =========== ===========
Weighted average shares outstanding 31,922,657 37,060,044 41,254,457
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 2000
---------------
<TABLE>
<CAPTION>
1999 2000
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(3,830,948) $(2,226,489)
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss from discontinued operations 510,962 -
Loss on disposal of discontinued operations 299,364 26,253
Depreciation and amortization 877,963 731,221
Provision for doubtful accounts 4,985 -
Loss on disposal of property and equipment 2,342 -
Common stock issued for services 60,400 199,930
Common stock issued for interest expense 486,000 323,514
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 144,593 141,508
Inventory 111,036 (284)
Restricted cash - (54,210)
Other assets 83,076 21,756
Book overdraft 36,888 (36,888)
Accounts payable and accrued liabilities 610,873 344,055
----------- -----------
Net cash used in continuing operations (431,865) (529,634)
Net cash provided by (used in) discontinued
operations (444,523) 126,579
----------- -----------
Net cash used in operating activities (876,388) (403,055)
----------- -----------
Cash flows from investing activities:
Capital expenditures (861,142) (324,077)
Capital expenditures of discontinued operations (12,879) -
Proceeds received from sale of property and
equipment 66,561 -
----------- -----------
Net cash used in investing activities (807,460) (324,077)
----------- -----------
Cash flows from financing activities:
Proceeds from notes payable 2,223,165 702,639
Proceeds from sale of common stock 10,000 167,500
Payments on notes payable (352,880) (133,403)
Payments on capital lease obligation (53,177) -
Purchase of treasury stock (150,000) -
----------- -----------
Net cash provided by financing activities 1,677,108 736,736
----------- -----------
Increase (decrease) in cash and cash equivalents (6,740) 9,604
Cash and cash equivalents, beginning of year 6,740 -
----------- -----------
Cash and cash equivalents, end of year $ - $ 9,604
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest expense $ 887,491 $ 143,430
=========== ===========
Cash paid for income taxes $ - $ -
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 2000
<TABLE>
<CAPTION>
ADDITIONAL UNISSUED
COMMON STOCK PAID-IN COMMON ACCUMULATED TREASURY
SHARES AMOUNT CAPITAL STOCK DEFICIT STOCK TOTAL
---------- -------- ----------- --------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30,
1998 30,093,460 $30,093 $5,049,378 $ 60,000 $(2,334,968) $ - $ 2,804,505
Purchase of 400,000 shares of
treasury stock - - - - (150,000) (150,000)
Issuance of common stock in con-
nection with the funding of
notes payable 2,050,000 2,050 543,950 (60,000) - - 486,000
Issuance of common stock for cash 66,667 68 9,934 - - - 10,000
Issuance of common stock for
services 369,750 369 60,031 - - - 60,400
Net loss for the year ended
September 30, 1999 - - - - (3,830,948) - (3,830,948)
---------- ------- ---------- -------- ----------- ---------- -----------
Balance at September 30, 1999 32,579,877 32,580 5,663,293 - (6,165,916) (150,000) (620,043)
Issuance of common stock for cash 988,889 989 166,511 - - - 167,500
Issuance of common stock for
services 1,519,500 1,519 198,411 - - - 199,930
Notes payable converted to common
stock 1,975,693 1,976 233,242 - - - 235,218
Issuance of common stock as
collateral 2,000,000 2,000 (2,000) - - - -
Issuance of common stock in pay-
ment of accrued interest 2,476,252 2,476 321,038 - - - 323,514
Net loss - - - - (2,226,489) - (2,226,489)
---------- ------- ---------- -------- ----------- ---------- -----------
Balance at September 30, 2000 41,540,211 $41,540 $6,580,495 $ - $(8,392,405) $(150,000) $(1,920,370)
========== ======= ========== ======== =========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC.
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 three 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.
During 1999, the Company was also in restaurant operations, but made a
strategic decision to discontinue those operations. (See Note 10)
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-8
<PAGE>
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC.
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 cash equivalents 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 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-9
<PAGE>
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC.
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-10
<PAGE>
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
--------------------------------------------------------------------
COMPREHENSIVE INCOME
--------------------
The Company has 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
-------------------
The Company has 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
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. GOING CONCERN CONSIDERATIONS
----------------------------
During the years ended September 30, 1999 and 2000, the Company has
experienced negative financial results as follows:
Continued
F-11
<PAGE>
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
2. GOING CONCERN CONSIDERATIONS, CONTINUED
---------------------------------------
1999 2000
----------- -----------
Net loss $(3,830,948) $(2,226,489)
Negative cash flows from
operations (913,276) (403,055)
Negative working capital (2,221,853) (5,442,904)
Accumulated deficit (6,165,916) (8,392,405)
Stockholders' deficit (620,043) (1,920,370)
In addition to its negative financial results, the Company has also
experienced operational problems as follows:
. During 1999, 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 is delinquent on payments of principal and accrued interest
for a significant portion of its note payable and capital lease
obligations. Additionally, at September 30, 2000, the Company is in
violation of numerous financial and non-financial covenants included in
such note payable and capital lease agreements for which waivers have not
been obtained. Debt under those agreements has been classified as current
in the accompanying financial statements (See Note 6 and 9) and could be
called by the creditors.
Management has developed specific current and long-term plans to address its
viability as a going concern as follows:
. During 1999 the Company 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. The elimination of
restaurant operations resulted in a reduction of losses of approximately
$800,000 in 2000 as compared to 1999.
Continued
F-12
<PAGE>
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
2. GOING CONCERN CONSIDERATIONS, CONTINUED
---------------------------------------
. The Company is currently in the final negotiation stages of a debt
reduction plan to exchange certain of its assets to repay approximately
$2,900,000 of long-term debt and related accrued interest. (See Note 3)
. During 2000 the Company took steps to add depth to its management team
with the addition of an experienced chief financial officer and
controller. Management is currently exploring ways to extinguish
additional debt in exchange for assets or through issuance of common stock
and to concentrate on its core business.
There can be no assurance that the Company's debt reduction plans will be
successful or that the Company will have the ability to implement its
business plan and ultimately attain profitability. The Company's long-term
viability as a going concern is dependent upon three key factors, as follows:
. The Company's ability to obtain adequate sources of debt or equity funding
to meet current commitments and fund the continuation of its business
operations in the near term.
. The ability of the Company to control costs and expand revenues from
existing or new businesses.
. The ability of the Company to ultimately achieve adequate profitability
and cash flows from operations to sustain its operations.
3. DEBT REDUCTION PLAN AND PRO-FORMA INFORMATION
---------------------------------------------
The Company has entered the final negotiation stages of a debt reduction
agreement (the "Debt Reduction Agreement"), the completion of which is
probable at September 30, 2000. Under the Debt Reduction Agreement the
Investor Notes (See Note 6) will be brought current and ultimately repaid
through the Company's contribution of certain property (a waterpark facility,
a racetrack and certain raw land) located in Midland, Texas and 2,200,000
shares of the Company's common stock, to a trust for liquidation, with the
proceeds used for repayment of the Investor Notes. The Debt Reduction
Agreement provides for any shortfall in the proceeds from liquidation of the
property and shares of the Company's common stock to be satisfied through the
Company's issuance of additional shares of the Company's common stock or
through the trustee's foreclosing on certain other property pledged by the
Company. If excess proceeds are received, such proceeds would be returned to
the Company after satisfaction of fees of the trust.
Continued
F-13
<PAGE>
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
3. DEBT REDUCTION PLAN AND PRO-FORMA INFORMATION, CONTINUED
--------------------------------------------------------
The unaudited proforma balance sheet as of September 30, 2000 gives effect to
the transaction as if it had occurred at that date. The unaudited proforma
statement of operations for the year ended September 30, 2000 gives effect to
the transaction as if it had occurred on October 1, 1999.
The unaudited proforma financial statements are presented for informational
purposes only and are not necessarily indicative of the results of operations
that would have been achieved had the transaction been completed at October
1, 1999, nor are they indicative of the Company's future results of
operations.
The Company believes that the assumptions used in preparing the unaudited
proforma balance sheet and statement of operations provides a reasonable
basis for presenting all of the significant effects of the debt repayment
agreement, and that the proforma adjustments give effect to those assumptions
in the unaudited proforma statements of operations.
Unaudited proforma adjustments to the consolidated balance sheet are as
follows:
a. Reduction of $1,957,350 to property to reflect the net book value of
assets to be placed in trust to provide proceeds for repayment of the
Investor Notes. The value of the property is assumed to be $2,450,000 at
September 30, 2000, based on independent appraisal.
b. Elimination of the Investor Notes in the amount of $2,600,000 and related
accrued interest of $198,798 at September 30, 2000.
c. Issuance of 4,194,409 shares of the Company's common stock to repay the
remaining portion of the Investor Notes and accrued interest not
extinguished with proceeds from sale of the property placed in trust as
described in a. above. The price of the Company's common stock is
assumed to be $0.11 based on the quoted market price at September 30,
2000.
Unaudited proforma adjustments to the consolidated statement of operations
are as follows:
a. Reduction in depreciation expense of $47,803, attributable to elimination
of the property placed in trust to provide proceeds for repayment of the
Investor Notes.
Continued
F-14
<PAGE>
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
3. DEBT REDUCTION PLAN, CONTINUED
------------------------------
b. Reduction in interest expense of $460,591 related to the elimination of
interest expense on the Investor Notes.
c. Gain on sale of the property placed in trust to provide for repayment of
the Investor Notes in the amount of $348,798 based on a comparison of the
appraised value with the net book value of the property at October 1,
1999.
d. Decrease in revenues, cost of revenues and general and administrative
expenses associated with the elimination of operating activities
involving the property placed in trust to provide for repayment of the
Investor Notes. The effect of these items (excluding depreciation
expense) was an improvement to loss from operations of $27,465.
4. 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
both September 30, 1999 and 2000 are stated net of an allowance for doubtful
accounts of $17,985.
5. PROPERTY AND EQUIPMENT
----------------------
Property and equipment consisted of the following at September 30, 2000:
Continued
F-15
<PAGE>
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
5. PROPERTY AND EQUIPMENT, CONTINUED
---------------------------------
Land $ 913,485
Buildings and improvements 1,626,405
Club equipment 2,446,974
Amusement games 2,035,259
Furniture and equipment 351,702
Vehicles 111,701
----------
7,485,526
Less: accumulated depreciation
and amortization 3,591,083
----------
Property and equipment, net $3,894,443
==========
Depreciation expense for the years ended September 30, 1999 and 2000 was
$920,589 and $731,221, respectively.
6. NOTES PAYABLE
-------------
Notes payable consist of the following at September 30, 2000:
Note payable to a bank (the "SBA Loan"),
bearing interest of 12.25% 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. $ 515,157
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. 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. 192,045
Continued
F-16
<PAGE>
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
6. NOTES PAYABLE, CONTINUED
------------------------
Note payable to factoring companies,
bearing interest at graduated rates
based upon the collection period
for factored receivables. 309,797
Note payable to a bank, bearing interest
of 14.25% per year and due on demand.
This note is not collateralized. 68,750
Note payable to a leasing company,
due in monthly payments of $1,112
through September 2004 and collateralized 50,253
by certain equipment.
----------
Total notes payable $3,736,002
==========
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.
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. Accordingly, the actual weighted average interest
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. During the year ended September 30, 2000, the Company incurred
costs of approximately $126,000 to further extend the Investor Notes.
Accordingly, the weighted average interest rate on these notes approximated
18% during the year ended September 30, 2000.
Continued
F-17
<PAGE>
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
6. NOTES PAYABLE, CONTINUED
------------------------
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 $486,000 of additional interest expense 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 and substantially all such costs
were amortized to expense in 1999.
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). At September 30, 2000 the
Company was in violation of certain covenants under the Investor Notes and
the Company is currently arranging to repay the Investor Notes under the Debt
Reduction Plan. (See Note 3)
7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
----------------------------------------
Accounts payable and accrued liabilities consisted of the following at
September 30, 2000:
Accounts payable, trade $ 545,803
Accrued payroll and related taxes 136,944
Accrued rent expense 79,373
Accrued interest expense 353,324
Sales taxes payable 56,493
Accrued property tax expense 65,241
Other accrued expenses 192,858
Accrued litigation settlement 82,500
----------
$1,512,536
==========
Continued
F-18
<PAGE>
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
8. 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 $8,800,000 which expire in various tax years through 2021.
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 will, in all likelihood, 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, 2000 are as follows:
Deferred tax assets:
Net operating losses $ 3,007,071
Other asset basis difference 34,805
Accrued liabilities and reserves 28,050
Valuation allowance (2,989,882)
-----------
Total deferred tax assets 80,044
-----------
Deferred tax liabilities:
Property and equipment (80,044)
-----------
Total deferred tax liability (80,044)
-----------
Net deferred tax asset (liability) $ -
===========
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 for the years ended September 30,
2000 and 1999 is as follows:
Continued
F-19
<PAGE>
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES, CONTINUED
-----------------------
<TABLE>
<CAPTION>
2000 1999
----------------- --------------------
AMOUNT % AMOUNT %
----------- ---- ------------ ----
(AS RESTATED)
<S> <C> <C> <C> <C>
Benefit for income tax at
federal statutory rate $(757,006) (34)% $(1,302,522) (34)%
Difference in depreciation (28,267) (1) 50,266 1
Difference in amortization
of start-up costs (11,601) (1) 46,406 1
Difference in recognition
of accrued expenses 6,847 1 21,203 -
Difference in recognition of
accrued loss on disposal of
discontinued operations (101,784) (5) 101,784 3
Difference in gain on sale
of asset - - 7,565 -
Non-deductible expenses 3,500 - 2,119 -
Increase in valuation
allowance 888,311 40 1,073,179 28
--------- ---- ----------- ----
$ - 0% $ - 0%
========= ==== =========== ====
</TABLE>
9. LEASE OBLIGATIONS
-----------------
Included in property and equipment in the accompanying consolidated balance
sheet at September 30, 2000 are the following assets held under a capital
lease:
Amusement games $1,200,000
Accumulated amortization (519,999)
----------
Assets under capital leases, net $ 680,001
==========
The Company has also entered into certain operating leases for offices and
retail operations. 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 $100,908 and $423,013 for the years ended September 30, 2000 and
1999, respectively. At September 30, 2000, due to liquidity problems, the
Company is eighteen months delinquent on rent at its headquarters in the
amount of $79,373.
Continued
F-20
<PAGE>
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
9. LEASE OBLIGATIONS, CONTINUED
----------------------------
Minimum lease payments due under leases with remaining lease terms of greater
than one year and expiration dates subsequent to September 30, 2000 are
summarized as follows:
YEAR ENDED CAPITAL
SEPTEMBER 30, LEASE
------------- --------
2001 $ 975,412
2002 75,000
2003 75,000
2004 75,000
2005 75,000
Thereafter 516,925
----------
Total minimum leases 1,792,337
Less amount representing interest 823,907
----------
Present value of minimum lease payments 968,430
Less current portion 568,430
----------
$ 400,000
==========
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, 2000 and 1999, the Company did
not comply with the lease covenants and at September 30, 2000, the Company
was thirty months past due on required payments under the lease obligation.
Such past due payments total $690,197 and include accrued interest expense of
$136,377, accrued sales tax expense of $53,590 and principal payments of
$500,230. 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.
Continued
F-21
<PAGE>
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
10. DISCONTINUED OPERATIONS
-----------------------
On September 15, 1999, the Company adopted a plan to dispose of all
restaurant operations. The Company's restaurant operations were conducted
through 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 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:
1999 2000
---------- --------
Net sales $1,607,613 $ -
Gain (loss) from operations (316,992) -
Gain (loss) from discontinued
operations (510,962) (26,353)
Net current liabilities of discontinued restaurant operations consist
primarily of accounts payable and accrued liabilities at September 30, 2000.
Continued
F-22
<PAGE>
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
11. CONTINGENCIES
-------------
During October 1998, 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, plus applicable interest and attorney's fees,
for breach of lease. During 2000, the case went to mediation and the lessor
received a settlement of $135,000. The Company paid $67,500 during 2000 and
has recorded an accrual of $67,500 at September 30, 2000.
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 wrote the related assets down to their estimated net realizable values.
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.
12. BUSINESS SEGMENTS
-----------------
During the fiscal year ended September 30, 1999 and 2000, the Company
operated primarily in three strategic business units that offer different
products and services: providing military entertainment services, retail
sale of sound and lighting equipment and design and operation of amusement
facilities and equipment. Restaurant operations have not been included in
segment information since they were reported as discontinued operations in
1999 (See Note 10). Financial information regarding the other business
segments is as follows:
Continued
F-23
<PAGE>
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
12. 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,
2000:
Revenues $3,327 $ 769 $ 722 $ - $ 4,818
Income (loss) from operations (109) (113) (935) (278) (1,435)
Total assets 1,060 163 3,128 28 4,379
Interest expense 74 18 673 - 765
Depreciation expense 357 5 362 7 731
Capital expenditures 303 7 14 - 324
YEAR ENDED SEPTEMBER 30.
1999:
Revenues $3,309 $ 945 $ 857 $ 43 $ 5,154
Income (loss) from operations (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
</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.
13. 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.
During the year ended September 30, 2000, the Company issued 1,975,693
shares of common stock to convert $235,218 of notes payable to equity.
Continued
F-24
<PAGE>
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
14. 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:
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
F-25
