UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2002
---------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ______________________
Commission File Number 0-23914
------------------------------
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC.
--------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 87-0521389
----------------------------------- -----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17300 Saturn Lane, Suite 111, Houston, TX 77058
----------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(281) 486-6115
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 of 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.
(1) YES XXX NO (2) YES XXX NO
----- ----- -----
As of December 31, 2002, the Registrant had outstanding 71,260,045 shares
of common stock, par value $0.001 per share.
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC.
TABLE OF CONTENTS
FORM 10-QSB FOR THE QUARTER ENDED DECEMBER 31, 2002
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements F-1
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations F-13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings F-16
Signature Page F-17
Certifications
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
- ------- ---------------------
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC. AND SUBSIDIARIES
__________
UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2002 AND 2001
F-1
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
__________
PAGE(S)
-------
Unaudited Consolidated Condensed Financial Statements:
Consolidated Condensed Balance Sheet as of December 31,
2002 (unaudited) and September 30, 2002 F-3
Unaudited Consolidated Condensed Statement of Operations
for the three months ended December 31, 2002 and 2001 F-4
Unaudited Consolidated Condensed Statement of Cash Flows
for the three months ended December 31, 2002 and 2001 F-5
Unaudited Consolidated Condensed Statement of Stockholders'
Deficit for the three months ended December 31, 2002 F-6
Selected Notes to Unaudited Consolidated Condensed Financial
Statements F-7
F-2
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
__________
DECEMBER 31,
2002 SEPTEMBER 30,
ASSETS (UNAUDITED) 2002
------ -------------- ---------------
Current assets:
Cash and cash equivalents $ 21,415 $ 34,558
Accounts receivable, net 489,662 465,777
Inventory 243,319 114,758
Prepaid expenses 45,542 32,913
-------------- ---------------
Total current assets 799,938 648,006
Property and equipment, net 665,292 709,800
Assets held for sale 2,858,816 2,858,816
Other assets 39,383 36,428
-------------- ---------------
Total assets $ 4,363,429 $ 4,253,050
============== ===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
- --------------------------------------
Current liabilities:
Current portion of notes payable to stockholders $ 598,155 $ 532,625
Current portion of notes payable and long-term debt 1,081,950 1,022,800
Current portion of capital lease obligations 55,418 55,418
Accounts payable and accrued liabilities 579,752 540,837
-------------- ---------------
Total current liabilities 2,315,275 2,151,680
Notes payable to stockholders 283,500 283,500
Notes payable and long-term debt 235,650 272,364
Capital lease obligation 60,422 87,447
Debt settlement trust obligation 3,444,843 3,444,843
-------------- ---------------
Total liabilities 6,339,690 6,239,834
-------------- ---------------
Commitments and contingencies
Stockholders' deficit:
Common stock, $.001 par value, 200,000,000 shares
authorized, 71,660,045 shares issued and
71,260,045 shares outstanding 71,660 71,660
Additional paid-in capital 8,745,055 8,745,055
Accumulated deficit (10,642,976) (10,653,499)
Treasury stock, 400,000 shares at cost (150,000) (150,000)
-------------- ---------------
Total stockholders' deficit (1,976,261) (1,986,784)
-------------- ---------------
Total liabilities and stockholders' deficit $ 4,363,429 $ 4,253,050
============== ===============
Note: The balance sheet at September 30, 2002 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. See notes to unaudited consolidated condensed financial
statements.
F-3
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
__________
THREE MONTHS
THREE MONTHS ENDED
ENDED DECEMBER 31,
DECEMBER 31, 2001
2002 (RESTATED)
============== ==============
Total revenue $ 911,594 $ 734,504
Total cost of sales and services 520,772 406,134
-------------- --------------
Gross margin 390,822 328,370
General and administrative expenses 289,596 268,582
Depreciation expense 55,386 46,200
-------------- --------------
Income from operations 45,840 13,588
-------------- --------------
Other income (expenses):
Interest expense (74,094) (100,682)
Gain on disposal of property and equipment 38,000 5,017
Severance pay to former employee - (34,676)
-------------- --------------
Total other income (expenses), net (36,094) (130,341)
-------------- --------------
Net income (loss) from continuing operations 9,746 (116,753)
Income (loss) from operation of discontinued
amusement segment 777 (48,331)
-------------- --------------
Net income (loss) before extraordinary item 10,523 (165,084)
Extraordinary loss on extinguishment of debt - (34,020)
-------------- --------------
Net income (loss) $ 10,523 $ (199,104)
============== ==============
Basic and diluted net loss per common share:
Continuing operations $ 0.00 $ (0.00)
Discontinued operations 0.00 (0.00)
Extraordinary item - (0.00)
-------------- --------------
Net income (loss) $ 0.00 $ (0.00)
============== ==============
Weighted average shares outstanding 71,260,045 61,433,199
============== ==============
See notes to unaudited consolidated condensed financial statements.
F-4
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
__________
THREE MONTHS THREE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
2002 2001
============== ==============
Cash flows from operating activities:
Net income (loss) $ 10,523 $ (199,104)
Adjustments to reconcile net income (loss) to
net cash used in operating activities (73,729) 88,452
-------------- --------------
Net cash used in operating activities (63,206) (110,652)
-------------- --------------
Cash flows from investing activities:
Capital expenditures (10,878) (21,093)
-------------- --------------
Net cash used in investing activities (10,878) (21,093)
-------------- --------------
Cash flows from financing activities:
Proceeds from sale of common stock - 35,000
Proceeds from notes payable 109,406 320,000
Payments on notes payable and capital lease
obligations (48,465) (32,195)
-------------- --------------
Net cash provided by financing activities 60,941 322,805
-------------- --------------
Increase (decrease) in cash and cash equivalents (13,143) 191,060
Cash and cash equivalents, beginning of period 34,558 30,288
-------------- --------------
Cash and cash equivalents, end of period $ 21,415 $ 221,348
============== ==============
See notes to unaudited consolidated condensed financial statements.
F-5
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE THREE MONTHS ENDED DECEMBER 31, 2002
__________
ADDITIONAL
COMMON STOCK PAID-IN ACCUMULATED TREASURY
SHARES AMOUNT CAPITAL DEFICIT STOCK TOTAL
============ ======== ============ ============= ========== ============
Balance at September 30, 2002 71,660,045 $ 71,660 $ 8,745,055 $(10,653,499) $(150,000) $(1,986,784)
Net income - - - 10,523 - 10,523
------------ -------- ------------ ------------- ---------- ------------
Balance at December 31, 2002 71,660,045 $ 71,660 $ 8,745,055 $(10,642,976) $(150,000) $(1,976,261)
============ ======== ============ ============= ========== ============
See notes to unaudited consolidated condensed financial statements.
F-6
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
__________
1. GENERAL
-------
The unaudited consolidated condensed financial statements included herein
have been prepared without audit pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted, pursuant to such rules and regulations. These
unaudited consolidated condensed financial statements should be read in
conjunction with the audited consolidated financial statements and notes
thereto of Entertainment Technologies & Programs, Inc. and Subsidiaries
(the "Company") included in the Company's Annual Report on Form 10-KSB for
the year ended September 30, 2002.
In the opinion of management, the unaudited consolidated condensed
financial information included herein reflect all adjustments, consisting
only of normal, recurring adjustments, which are necessary for a fair
presentation of the Company's financial position, results of operations and
cash flows for the interim periods presented. The results of operations for
the interim periods presented herein are not necessarily indicative of the
results to be expected for a full year or any other interim period.
2. BACKGROUND
----------
Entertainment Technologies & Programs, Inc. ("ETP") and its wholly-owned
subsidiaries (the "Company") are engaged in two major areas of operations
as follows:
- Operation of entertainment facilities on United States military bases
throughout the world, including the planning, promotion and production
of live performances at such facilities.
- Sale of professional sound and lighting equipment and security video
to both the United States military and the non-military consumer
markets.
The accompanying consolidated condensed 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.
3. GOING CONCERN CONSIDERATIONS
------------------------------
At December 31, 2002 the Company had a working capital deficit of
$(1,515,337) and a stockholders' deficit of $(1,976,261). During the three
months ended December 31, 2002 and 2001, the Company experienced net income
of $10,523 and a net loss of $(199,104), respectively, and negative cash
flows from operations of $(63,206) and $(110,652), respectively.
At December 31, 2002, in addition to its negative financial results, the
Company is delinquent on payments of principal and accrued interest on
certain of its notes payable and is in violation of financial and
non-financial covenants included in such note payable for which waivers
have not been obtained. Debt under those agreements has been classified as
current in the accompanying financial statements and certain balances could
be called by the creditors.
Continued
F-7
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
__________
3. GOING CONCERN CONSIDERATIONS, CONTINUED
------------------------------------------
Management developed specific current and long-term plans to address its
viability as a going concern as follows:
- During 2001 the Company began a multi-stepped debt reduction plan (the
"Plan"). In addition to this Plan, management is currently exploring
ways to extinguish additional debt in exchange for assets or through
issuances of common stock and to concentrate on its core business.
- During 2002 and 2001 the Company took steps to restructure its
management team and Board of Directors.
- In 2002, the Company discontinued its amusement operations in order to
focus on its segments in which the Company believes it possesses core
competencies.
There can be no assurance 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 these
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 minimize or eliminate cost and expenses
of litigation outside the normal course of business.
- The ability of the Company to ultimately achieve adequate
profitability and cash flows from operations to sustain its
operations.
As a result of the going concern issues facing the Company, the Company's
independent auditors included an explanatory fourth paragraph stating that
there is substantial doubt about the Company's ability to continue as a
going concern in their report on the Company's financial statements for the
year ended September 30, 2002.
4. DISCONTINUED OPERATIONS
------------------------
In January 2002, the Company formalized its plan to offer for sale its
amusement operations and assets. Accordingly, results for the Company's
amusement operations have been segregated and reported separately as
discontinued operations. Amounts for prior periods reported have been
restated to reflect these discontinued operations. On December 18, 2002 the
Company completed the disposition of a significant portion of its amusement
operations and assets when it reached an agreement with certain creditors
of the Company to accept certain of the Company's amusement assets as part
of a broad agreement to settle substantial obligations of the Company. The
Company is actively marketing its remaining amusement assets and expects to
complete a sale in 2003.
Continued
F-8
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
__________
5. INCOME TAXES
-------------
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The
Company has provided deferred tax valuation allowances for cumulative net
operating tax losses to the extent that the net operating losses may not be
realized. The difference between the federal statutory income tax rate and
the Company's effective income tax rate is primarily attributed to changes
in valuation allowances for deferred tax assets related to net operating
losses.
6. BUSINESS SEGMENTS
------------------
During the three months ended December 31, 2002 and 2001, the Company
operated primarily in two strategic business units that offer different
products and services: military entertainment services and retail sale of
sound and lighting equipment. Financial information regarding business
segments is as follows:
MILITARY MILITARY CORPORATE
ENTERTAINMENT PRODUCTS AND OTHER DISCONTINUED TOTAL _
-------------- --------- ----------- -------------- -----------
THREE MONTHS ENDED
DECEMBER 31, 2002:
Revenues $ 519,691 $ 391,903 $ - $ 81,074 $ 992,668
Net income (loss) 71,147 50,541 (111,942) 777 10,523
Total assets 885,459 581,516 37,638 2,858,816 4,363,429
THREE MONTHS ENDED
DECEMBER 31, 2001:
Revenues $ 525,330 $ 209,174 $ - $ 116,340 $ 850,844
Net income (loss) 84,983 13,473 (249,229) (48,331) (199,104)
Total assets 1,059,247 231,491 310,917 889,795 2,491,450
Intersegment receivables and payables have been shown net in total assets
for each segment. The Company evaluates performance based on operating
earnings of the respective business units.
Total revenues reported on the consolidated condensed statement of
operations are net of the revenues of the discontinued segment as those
revenues are presented in the caption income (loss) from operations of
discontinued amusement segment.
7. DEBT SETTLEMENT TRUST OBLIGATION
-----------------------------------
In December 2000, the Company entered into an agreement (the "Trust
Agreement") with the holders of the Investor Notes. Under the terms of the
Trust Agreement, the Company placed certain of its amusement properties
with an appraised value of $2,495,000 (the "Properties) into a trust (the
"Trust") that was established to (i) consolidate the ownership interests of
the individual holders of the Investor Notes into beneficial interests in
the Trust, (ii) liquidate the Properties that were placed into the Trust,
and (iii) distribute the proceeds from liquidation of the Properties to the
beneficial interests in the Trust. The Trust ultimately seeks to
Continued
F-9
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
__________
7. DEBT SETTLEMENT TRUST OBLIGATION, CONTINUED
-----------------------------------------------
fully retire the Investor Notes plus accrued interest through the date of
retirement. At the inception of the Trust, the Investor Notes had a face
value of $2,600,000 and accrued interest of $320,487. An extension fee of
10% of the outstanding note balance is due to the beneficial holders
quarterly and is to be paid by the Trust. The Company has also agreed to
place shares of its restricted common stock and certain other amusement
properties into the Trust if the Properties prove insufficient for the
purposes of the Trust, which include payment of trust expenses and
extension fees.
On December 18, 2002, the Trust was amended to provide a final settlement
plan (the "Plan") for the Company's liability to the Trust. Substantially
all assets of the Company's discontinued amusement operations are in the
Trust or are subject to sale or transfer to the trust under the Plan.
Following is an analysis of the debt settlement trust obligation at
December 31, 2002:
Investor notes to be repaid by the Trust $2,600,000
Accrued interest on the investor notes 651,247
Accrued operating expenses 193,596
----------
Debt settlement trust obligation $3,444,843
==========
Under the terms of the Plan the Company will issue 2,000,000 shares of
redeemable convertible preferred stock to the Trust. Such preferred stock,
along with the proceeds from sale of certain amusement real estate located
in Pasadena, Texas will represent the Company's final funding to the Trust
and will result in the elimination of both the assets held for sale and the
debt settlement trust obligation shown in the accompanying balance sheet.
The terms of the Plan serve to end the Company's continuing financial
interest in the amusement properties previously transferred to the trust.
Following is a description of the preferences of the preferred stock that
will be issued to the Trust:
- Stated value and liquidation preference of $1.00 per share or an
aggregate liquidation preference of $2,000,000.
- Convertible at the election of the holders at any time after issuance
to shares of the Company's common stock at a conversion rate of five
shares for one. This feature would result in the Company's issuance of
10,000,000 shares of common stock if all preferred shares were
converted. This type of conversion requires thirty days written notice
by the holders.
- Convertible at the election of the Company at any time after the
Company's common stock has traded at or above a closing bid price of
$0.25 for thirty consecutive trading days. The conversion rate in this
circumstance will also be five shares for one. This type of conversion
requires thirty days written notice by the Company.
- Redeemable at the stated value, at the election of the Company, on a
pro rata basis among all holders, any portion of the preferred stock.
This redemption provision requires forty-five days written notice to
the holders during which time the holders may elect to convert.
Continued
F-10
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
7. DEBT SETTLEMENT TRUST OBLIGATION, CONTINUED
-----------------------------------------------
- Mandatory redemption beginning in the fiscal year ending September 30,
2006 based upon twenty percent of net income as presented in the
Company's audited financial statements. This redemption feature will
continue until all shares have been redeemed.
Following is the December 31, 2002, condensed pro forma balance sheet of
the Company as if the Plan had been implemented at that date:
PROFORMA ADJUSTED
AS REPORTED ADJUSTMENTS TOTAL
ASSETS (UNAUDITED) (UNAUDITED) (UNAUDITED)
------ ------------- --------------- ------------
Total current assets $ 799,938 $ - $ 799,938
Property and equipment, net 665,292 - 665,292
Assets held for sale 2,858,816 (1)(2,314,886) 543,930
Other assets 39,383 - 39,383
------------- --------------- ------------
Total assets $ 4,363,429 $ (2,314,886) $ 2,048,543
============= =============== ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
- -------------------------------------
Total current liabilities $ 2,315,275 $ - $ 2,315,275
Notes payable to stockholders 283,500 - 283,500
Notes payable and long-term debt 235,650 - 235,650
Capital lease obligation 60,422 - 60,422
Debt settlement trust obligation 3,444,843 (2)(3,444,843) -
Convertible preferred stock - (3) 160,000 160,000
Commitments and contingencies
Stockholders' deficit:
Common stock, $.001 par value,
200,000,000 shares authorized,
71,660,045 shares issued and
71,260,045 shares outstanding 71,660 - 71,660
Additional paid-in capital 8,745,055 - 8,745,055
Accumulated deficit (10,642,976) (4) 969,957 (9,673,019)
Treasury stock, 400,000 shares at
cost (150,000) - (150,000)
------------- --------------- ------------
Total stockholders' deficit (1,976,261) 969,957 (1,006,304)
------------- --------------- ------------
Total liabilities and
stockholders' deficit $ 4,363,429 $ (2,314,886) $ 2,048,543
============= =============== ============
Continued
F-11
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
7. DEBT SETTLEMENT TRUST OBLIGATION, CONTINUED
-----------------------------------------------
The above Proforma adjustment (1) eliminates the waterpark and raceway
assets previously transferred to the trust because the Company will have no
continuing financial interest in those assets; (2) eliminates the debt
settlement trust obligation that will be satisfied under the Plan; (3)
recognizes the issuance of 2,000,000 shares of convertible preferred stock
with a value of $160,000 at the date of approval of the Plan; and (4)
recognizes an extraordinary gain of $969,957 upon extinguishment of the
debt settlement trust obligation.
The following unaudited proforma data summarizes the operating results of
the Company as if the transaction under the Plan had occurred at the
beginning of the year ended September 30, 2002 and the three month periods
ended December 31, 2002 and 2001.
YEAR ENDED
SEPTEMBER 30, 2002
-------------------------
AS PROFORMA
REPORTED (UNAUDITED)
----------- ------------
Revenue $2,949,299 $ 2,949,299
Net income (loss) $ (787,632) $ 182,325
Basic and diluted earnings (loss) per share:
Before extraordinary item $ (0.01) $ (0.01)
Extraordinary item 0.00 0.01
----------- ------------
Net income (loss) per share $ (0.01) $ 0.00
=========== ============
THREE MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, 2002 DECEMBER 31, 2001
----------------------- ------------------------
AS PROFORMA AS PROFORMA
REPORTED (UNAUDITED) REPORTED (UNAUDITED)
--------- ------------ ---------- ------------
Revenue $ 911,594 $ 911,594 $ 734,504 $ 734,504
Net income (loss) $ 10,523 $ 980,480 $(199,104) $ 770,853
Basic and diluted earnings
(loss) per share:
Before extraordinary item $ 0.00 $ 0.01 $ (0.00) $ 0.01
Extraordinary item - - (0.00) (0.00)
--------- ------------ ---------- ------------
Net income (loss) per
share $ 0.00 $ 0.01 $ (0.00) $ 0.01
========= ============ ========== ============
Continued
F-12
ENTERTAINMENT TECHNOLOGIES & PROGRAMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
7. DEBT SETTLEMENT TRUST OBLIGATION, CONTINUED
-----------------------------------------------
The proforma adjustments recognized in preparing the above information on
results of operations were as follows:
Elimination of interest expense on trust
obligations $ 260,000
Elimination of loss on securities transferred
to the trust 136,000
Loss on operation of discontinued segments in
which the Company has no continuing financial
interest 133,666
Extraordinary gain on extinguishment of debt 440,291
----------
$ 969,957
==========
Continued
F-13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------ -----------------------------------------------------------------------
OF OPERATIONS.
- --------------
The following discussion should be read in conjunction with the Company's
unaudited consolidated interim financial statements and related notes thereto
included in this quarterly report and in the unaudited consolidated Financial
Statements and Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") contained in the Company's 10-KSB for the year
ended September 30, 2002. Certain statements in the following MD&A are forward
looking statements. Words such as "expects", "anticipates", "estimates" and
similar expressions are intended to identify forward looking statements. Such
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those projected.
RESULTS OF OPERATIONS
-----------------------
Revenues for the quarter ended December 31, 2002 increased by $177,090, or
approximately 24%, from a restated $734,504 for the quarter ended December 31,
2001 to $911,594 for the quarter ended December 31, 2002 primarily due to an
increase in sales in our Performance Sound & Light, Inc. ("PS&L") subsidiary
during the quarter ended December 31, 2002.
General and administrative expenses increased by $21,014 from a restated
$268,582 for the quarter ended December 31, 2001 to $289,596 for the quarter
ended December 31, 2002 primarily due to an increase in litigation expenses
related to the Company's continued legal disputes with and as a result of
actions by prior management.
Gross margin for the quarter decreased from 44.7% to 42.9% primarily due to
purchase discount programs implemented by PS&L in order to encourage increased
sales to our military customers.
Interest expense decreased by $26,588, or approximately 26%, from a
restated $100,682 for the quarter ended December 31, 2001 to $74,094 for the
quarter ended December 31, 2002. This decrease is primarily a result of the
elimination of extension fees recorded as interest on the Company's trust
obligation during the quarter ended December 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES
----------------------------------
During the year ended September 30, 2002, the Company experienced negative
financial results which have continued during the three months ended December
31, 2002 as follows:
THREE MONTHS
ENDED YEAR ENDED
DECEMBER 31, SEPTEMBER 30,
2002 2002
-------------- ---------------
Net income (loss) $ 10,523 $ (787,632)
Negative working capital (1,515,337) (1,503,674)
Negative cash flows from operations (63,206) (339,209)
Accumulated deficit (10,642,976) (10,653,499)
Stockholders' deficit (1,976,261) (1,986,784)
In addition to its negative financial results, the Company is also
delinquent on payments of principal and accrued interest on certain of its notes
payable. Additionally, at December 31, 2002 and September 30, 2002, the Company
is in violation of financial and non-financial covenants included in such notes
payable for which waivers have not been obtained. Debt under those agreements
has been classified as current in the accompanying financial statements and
certain balances could be called by the creditors.
Continued
F-14
Management has developed specific current and long-term plans to address
its viability as a going concern as follows:
- During 2001 the Company began a multi-stepped debt reduction plan (the
"Plan"). In the first phase of the Plan, the Company agreed to
exchange certain of its assets to ultimately repay approximately
$2,900,000 of long-term debt and accrued interest. In the second phase
of the Plan, in December 2001, the Company completed an exchange offer
to retire capital lease obligations with a face value of $806,000 in
exchange for shares of the Company's common stock. In the third phase
of the Plan, management is currently exploring ways to extinguish
additional debt in exchange for assets or through issuances of common
stock and to concentrate on its core business.
- During 2001, the company took steps to restructure its management team
and board of directors.
There can be no assurance 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 these 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 minimize or eliminate cost and expenses
of litigation outside the normal course of business.
- The ability of the Company to ultimately achieve adequate
profitability and cash flows from operations to sustain its
operations.
As a result of the going concern issues facing the Company, the Company's
independent auditors included an emphasis paragraph in their report on the
Company's financial statements for the year ended September 30, 2002.
INFORMATION REGARDING AND FACTORS AFFECTING FORWARD LOOKING STATEMENTS
---------------------------------------------------------------------------
The Company is including the following cautionary statement in this
Quarterly Report on Form 10-Q 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 expectation, beliefs or
projections will result, or be achieved, or be accomplished.
Continued
F-15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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1. No. 2001-56974; Market News Alert, Inc. vs. Entertainment Technologies &
Programs, Inc., In the District Court of Harris County, Texas; 334th Judicial
District
This case is founded upon an alleged written contract between the parties
dated on or about April 25, 2001. The plaintiff alleges that it was employed by
Entertainment Technologies & Programs, Inc. as a consultant to disseminate
information to the public to at least 1,000,000 potential investors, in a manner
to encourage investments in Entertainment Technologies & Programs, Inc. The
compensation agreed in the written contract was the payment by Entertainment
Technologies & Programs, Inc. to Market News Alert, Inc. of 1,000,000 shares of
common stock, restricted pursuant to the provisions of Rule 144. Counsel feels
the case has little merit and substantial evidence is available to prove Market
News Alert, Inc. failed to fulfill its obligations under the written agreement.
Management intends to contest this case vigorously and counsel believes that a
favorable outcome is probable.
2 No. 2002-08825; Entertainment Technologies & Programs, Inc. vs. James
Douglas Butcher, in the District Court of Harris County, Texas; 151st Judicial
District
On February 12, 2002, the Company filed suit against James Douglas Butcher,
former Chairman and Chief Executive Officer of the Company, to recover an
unspecified amount of damages due to Mr. Butcher's alleged violation of a
covenant not to compete, breach of fiduciary duty, breach of contract and
conversion relating to his employment agreement dated November 10, 1995 and
effective as of May 11, 1995. On February 27, 2002, Mr. Butcher filed
counterclaims against the Company. The Company intends to vigorously prosecute
this matter to a conclusion, though the Company cannot predict with any
certainty the eventual outcome of this litigation.
3. No. 773241; Vincent Schappel vs. Entertainment Technologies & Programs,
Inc. in County Court #3, Harris County, Texas
A suit has been filed against the Company by Vincent Schappell
("Schappell") for the principal amount due of $40,000 resulting from a
settlement agreement dated May 2001 between Schappell and the Company and it is
likely that the plaintiff will prevail. The Company has established an accrued
liability as of December 31, 2002, to cover the Company's exposure.
Subsequently, Schappell received a final judgment and the Company has initiated
discussions with Mr. Schappell regarding satisfying this judgment.
4. No. 2002-34587; Candace Walls vs. Marcello Gonzales and Entertainment
Technologies & Programs, Inc., in the 269th District Court of Harris County,
Texas
A suit has been filed against the Company and a former employee of the
Company alleging sexual harassment. The suit alleges no specific monetary
damage and, in the opinion of management and the Company's legal counsel, is
without merit.
Continued
F-16
SIGNATURES
Pursuant to the requirements of the Securities and 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 & PROGRAMS, INC.
Date: February 14, 2003 By: /s/ George C. Woods
------------------------ ----------------------------------
George C. Woods, President, Chief
Executive Officer, Chief Financial
Officer and Director
Date: February 14, 2003 By: /s/ Gabriel A. Martin
------------------------ ----------------------------------
Gabriel A. Martin, Director
Date: February 14, 2003 By: /s/ Kevin P. Regan
------------------------ ----------------------------------
Kevin P. Regan, Director
Date: February 14, 2003 By: /s/ Richard D. Gittin
------------------------ ----------------------------------
Richard D. Gittin, Director
F-17
CERTIFICATIONS
CEO CERTIFICATION
I, George C. Woods, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Entertainment
Technologies & Programs, Inc. (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiary, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. I have disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/S/ GEORGE C. WOODS
Date: February 14, 2003 ----------------------
George C. Woods
President and Chief
Executive Officer
CFO CERTIFICATION
I, George C. Woods, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Entertainment
Technologies & Programs, Inc. (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiary, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. I have disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/S/ GEORGE C. WOODS
----------------------
Date: February 14, 2003 George C. Woods
Chief Financial Officer