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ETPI suit follows the money

http://www.kioskmarketplace.com/news_story.htm?i=10363

by Michael Jackman, editor • June 19, 2001

That companies want to make a quick buck isn't surprising. But when two companies with The Plaintiff

Name: Entertainment Technologies & Programs Inc.
Based in: Houston
Business: Entertainment services to U.S. Armed Forces.
Traded: OTCBB:ETPI
Founded: 1978
Annual Revenue: $4.8 million for year ended Sept. 30, 2000 Employees: 30
Contractors: 400
Web site: www.etpinc.net What's up? Suing GameCom for interference with a proposed ETPI-Ferris merger.

no profits fight over an acquisition worth $5 million in revenue, chances are they'll come into conflict.

That's what happened with GameCom Inc. and Entertainment Technologies & Programs Inc. GameCom, maker of Internet arcade game kiosks, attracted a company with $5 million in revenue away from a deal with government entertainment supplier ETPI. Now ETPI is suing GameCom as well the company it was going to buy, Ferris Productions Inc.

Ferris earns the revenue both companies are fighting for from its amusement park virtual reality (VR) games and custom-designed VR projects. The lawsuit was filed April 23, 2001 in Harris County (Texas) District Court against Ferris and GameCom Inc., alleging breach of contract and interference, among other things.

L. Kelly Jones, GameCom chief executive officer, said of the suit, "We think it is meritless. We have filed an answer and counterclaim for a bad faith lawsuit not only for ETPI but for its lawyers as well--that's how serious we think this abuse is."

If Ferris and GameCom can merge without interference from ETPI, the two companies may be better poised to stake a claim to mine the revenue from the gaming media. With Ferris know-how and revenue, and GameCom’s public stock, the merger could produce a stronger game player. The combined companies could tap into the flow of Internet-console powered game revenue, which Forrester Research predicts could reach $26 billion by 2005.

We’re not playing

Last March, ETPI signed a letter of intent to buy Ferris Productions Inc. In April, Ferris decided it didn't want to play with ETPI. Ferris founder and chief executive officer Bob Ferris cancelled the letter of intent. A day later he signed a new one with video game kiosk maker GameCom. In the new agreement, the companies will exchange stock. Before the ink was dry, ETPI filed suit against GameCom. Soon after, Ferris was sued.

Philip Cardwell, head of investor relations at ETPI, said, "There was, in our mind, a mutually exclusive binding letter of intent that was not to expire until the end of June and we feel like that was under breach of contract with Ferris that that letter was violated."

Game plans

Ferris does not manufacture kiosks, exactly. Its virtual reality systems use a headset Defendant

Name: Ferris Productions Inc.
Based in: Phoenix
Business: Virtual reality systems
Traded: No
Founded: 1993
Annual Revenue: about $5 million
Employees: 160
Web site: www.ferrisvr.com What's up? Wants a company to take it public and to help with financing.

rather than a touchscreen. The machine it made for Red Baron Pizza is a case in point. Donning a headset, a user becomes a World War I biplane pilot, complete with a 360 degree view. Visitors will sit in the virtual cockpit, don a headset, and by pressing buttons, they will perform aerobatic stunts in a Red Baron vintage Stearman biplane.

“This project could be called a kiosk, it just happens to be the next generation kiosk on steroids where you sit in a sit and put a headset on. If your definition is that a kiosk is a physical object that provides interaction with people in a self-vending manner than it would fit that. It would just be one unlike you have ever seen,” Ferris said.

The company has designed VR projects for Pepsi, IBM and Mercedes-Benz in addition to Red Baron Pizza. A large part of its business, worth the $5 million brass ring which ETPI thought it was going to grab, are its amusement park attractions.

Ferris hires and trains about 160 employees to run its machines at U.S. locations of Six Flags, Busch Gardens, Paramount Parks, and Circus Circus and Stratosphere, both in in Las Vegas. Each location has between six and 12 units. To use them, customers pay between $4 and $6 for a five-minute thrill.

Ferris designs, manufactures, and owns all its machines, which can cost up to $10,000. In return for loaning it the real estate, the amusement parks receive a commission that could amount to $1 million per season, Ferris said.

Social gaming

GameCom’s Jones, on the other hand, is not a game programmer. Jones is a lawyer who Defendant

Name: GameCom
Based in: Arlington, Texas
Business: Net GameLink Internet arcade game kiosks.
Traded: OTCBB: GAMZ
Founded: 1996
Annual Revenue: $410 for year ended Dec. 31, 2000
Employees: 5
Web site: www.gamecominc.com
What's up? Wants Ferris revenues to help put it in a major exchange.

sees a strong future in Internet gaming kiosks.

“I don't pretend to be the guru of gaming, but we think that the gaming industry is failing to realize the success of the play station. It's not their enemy, it's their friend, because it's making computer gaming more mainstream,” he said.

GameCom makes a kiosk called Net GameLink. These personal computer-based kiosks host 10 different games that customers can play with other players at other kiosks, over an Internet connection. The games include the quintessential PC computer games, Doom and Quake.

The five-employee company, founded in 1996, is off to a slow start. Five Net GameLink kiosks are installed at Arlington’s J. Gilligans restaurant and bar, and three others at local Cinemark theaters. Those three test machines have been taken out to add coin acceptors. They will be replaced soon, Jones said.

GameCom is borrowing the business model of the arcade business. Jones plans to sell Net GameLink kiosks to distributors who will install them. GameCom will earn 15 percent of coin revenue. In return, the location owner and distributor will get GameCom’s services, which include monitoring and upgrading the kiosks, and changing the mix of games.

Jones said GameCom will also sell advertising on screen savers, and on-screen logos and banners.

Let me keep entertaining you

Philip Cardwell, ETPI’s head of investor relations, said the company has had a rough ride lately.

"ETPI been profitable in various quarters, but to the best of my knowledge they never had a full year of profitability,” Cardwell said of the 23 year-old firm, which went public in 1995. “We had never had very good earnings per share, consistently."

The company provides nightclub entertainment and rents entertainment equipment such as lighting and sound to U.S. Armed Forces.

Recently, it has been reorganizing. Cardwell said that by selling some of its business and equipment, the company reduced its liabilities from $6.3 million to $3.5 million. ETPI isn’t finished yet.

“The company had a tremendous amount of cash flow in the past. Unfortunately, it got into some businesses that were probably better left alone.”

Cardwell said he was hired as part of an upper level management restructuring to fix the company's financial position, eliminate bad business investments and move the company from the penny-stock Over The Counter Bulletin Board (OTCBB) exchange to a major exchange. He said that had the Ferris merger been successful, the company would have earned the additional $5 million in revenue from Ferris’ existing operations.

Let the games begin

Not surprisingly, Jones said that Ferris’ existing revenue stream was part of its attraction to GameCom.

“We're a OTCBB company and we want to get to an exchange as soon as we reasonably can. We thought it would take us longer than we wanted to just by selling GameLink. We wanted to bring in a private company that was a little further than we were both in terms of revenue stream and market penetration to bring in the revenue to quality for an exchange,” Jones said.

Why was Ferris, a company with a solid technical base, plenty of clients, and a nearly profitable business model (it was close to earning a profit last year), interested in either company?

“The area that we've lacked to date is a solid financial partner,” Ferris said.

It gradually dawned on Ferris that ETPI would not be solid enough.

“In our due diligence investigation of ETPI we concluded that it was appropriate to terminate the letter of intent,” Ferris said. Believing at one time that the deal was worth pursuing, Ferris actually loaned ETPI $125,000 to help it with its financing.

“We had provided them a loan over November of ‘99 that was to be paid back in three months. That has been in default,” he said. “By the beginning of April we were pretty much fed up with them.”

Ferris found GameCom to be attractive because of its lawyer-chief.

“I believe Kelly Jones is an above average CEO. He is good at interfacing with Wall Street and the investment community, and that will be his focus as CEO (of the combined companies), Ferris said.

They won’t sue

Initially, Bob Ferris was surprised by the ETPI suit.

"Why does the CEO say to the principle shareholder of the company, 'We're not going to make it to the dance,' and then turn around and sue them when they terminate the agreement? It's hard for me to speak to that," he said.

Neither Jones nor Ferris think ETPI will see the suit through to its conclusion. Both expect their merger to go through, and both say the suit is without cause.

“We think it is meritless. We have filed an answer and counterclaim for a bad faith lawsuit not only for ETPI but for its lawyers as well, that's how serious we think this abuse is,” Jones said.

Cardwell declined to discuss the specifics of the case.

Ferris explained that his company had the legal right to terminate the letter of intent.

“The negotiation section was classified non binding. We had every freedom to talk to GameCom during the course of investigating ETPI,” he said.

Game Over

Ferris said, “They have not sought an injunction that I'm aware of. It they did seek an injunction they would have to put up a bond for the potential damages done. I don't think they have the means, plus they’re really risking that they would win the case.”



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