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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB
General Form for Registration of Securities
Of Small Business Issuers Pursuant to Section 12(b) or (g) of
the Securities Exchange Act of 1934
FORTUNE ENTERTAINMENT CORPORATION
(Name of Small Business Issuer in its charter)
DELAWARE 88-0405437
(State or other jurisdiction (I.R.S. Employer
of incorporation Identification No.)
or organization)
2700 East Sunset Road
Suite 39
Las Vegas, Nevada 89120
(Address of principal executive offices) (Zip Code)
(702) 895-7812
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
None None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, $.0001 par value
(Title of Class)
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TABLE OF CONTENTS
Item Page
- - ---- ----
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS 4
PART I
Item 1. Description of Business 5
(a) Business Development 5
(b) Business of the Issuer 6
Risk Factors 17
Item 2. Management's Discussion and Analysis or Plan of Operation 25
Item 3. Description of Property 26
Item 4. Security Ownership of Certain Beneficial Owners and Management 26
Item 5. Directors, Executive Officers, Promoters and Control Persons 27
Item 6. Executive Compensation 29
Summary Compensation Table
Stock Options
Item 7. Certain Relationships and Related Transactions 31
Item 8. Description of Securities 32
PART II
Item 1. Market Price of and Dividends on the Registrant's
Common Equity and Other Shareholder Matters. 34
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Item 2. Legal Proceedings 34
Item 3. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 35
Item 4. Recent Sales of Unregistered Securities 35
Item 5. Indemnification of Directors And Officers 39
PART F/S
FINANCIAL STATEMENTS
List of Financial Statements 40
PART III
Item 1. Index to Exhibits. 41
Item 2. Description of Exhibits 41
SIGNATURES
INDEX TO FINANCIAL STATEMENTS F-1
Financial Statements of Fortune Entertainment Corporation
Audited Financial Statements of Fortune Entertainment
Corporation for the period August 19, 1997
to December 30, 1997 F-2
Unaudited Financial Statements of Fortune Entertainment
Corporation for the six month period ended
June 30, 1998 F-22
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Financial Statements of Fortune Entertainment
Corporation (Bahamas)
Audited Financial Statements of Fortune Entertainment
Corporation for the year ended December 31, 1997
and the period from incorporation on April 2,
1996 to December 31, 1996 F-31
Pro Forma Unaudited Consolidated Statements of Operations
of Fortune Entertainment Corporation and Fortune
Entertainment Corporation (Bahamas) for the
year ended December 31, 1997 F-39
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-SB includes forward-looking statements. All statements, other than
statements of historical fact, included in this Form 10-SB, including, without
limitation, statements under "Description of Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
regarding the Company's business strategy and plans and objectives of management
of the Company for future operations, are forward-looking statements. Although
the Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to have been correct. Important factors that could cause actual results to
differ materially from the Company's expectations are disclosed in this Form 10,
including, without limitation, in conjunction with the forward-looking
statements included in this Form 10. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by this section.
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Item 1. Description of Business.
(a) Business Development
Fortune Entertainment Corporation, a Delaware corporation (the
"Company"), was incorporated on August 25, 1997, and is engaged in the
acquisition, design and development of select gaming products which the Company
intends to sell, lease and license, directly, through independent sales
representatives and distributors and through joint marketing arrangements, in
United States and international gaming markets. The Company intends to place its
initial emphasis on the United States Tribal Indian, Charity, Riverboat and
Cruise Ship gaming markets. The Company is in the development stage and has not
as yet realized revenues from the sale, lease or licensing of its products. The
principal executive offices of the Company are located at 2700 East Sunset Road,
Suite 39, Las Vegas, Nevada 89120 (tel. no. 702-895-7812). The Company's common
stock (the "Common Stock") is listed and traded on the NASD's OTC Bulletin Board
(the "Bulletin Board") under the trading symbol "FETG."
The Company's initial products are the Fortune Poker System, an
interactive, progressive, tournament video terminal poker game which allows the
player to play against the individual machine or other players, and "Rainbow
21," a blackjack game played on a modified felt layout, that permits each of the
six players to wager on their own and any of the five other hands at once. See
"Business of the Issuer." Since its inception, the Company has expended over
$729,468 in cash, issued 2,097,500 shares of Common Stock and incurred future
cash payment obligations of $955,000 for the purchase and development of the
Fortune Poker and Rainbow 21 gaming products. The Company has also agreed to
issue additional shares or make cash payments in lieu thereof to the applicable
sellers if the Company's Common Stock does not achieve and maintain a price
level, as prescribed by the applicable agreements, of $2.00 per share in the
case of the Fortune Poker acquisition and $2.25 per share in the case of the
Rainbow 21 acquisition. See "Business of the Issuer Material Acquisitions"
below.
In October 1997, the Company acquired Fortune Entertainment
Corporation, a Bahamas corporation ("Fortune Bahamas"), in exchange for
1,090,464 shares of the Company's Common Stock and an equal number of shares of
each of the Company's three classes of Series A, Series B and Series C Preferred
Stock. The Fortune Bahamas subsidiary holds the Company's interest in the
Fortune Poker System. See "Business of the Issuer - Fortune Poker System and
Material Acquisitions" below.
The Company acquired the rights to the Rainbow 21 blackjack game in
July 1998 from its developer, Team Rainbow, Inc., pursuant to an agreement dated
November 19, 1997, as amended. In August 1998 the Company granted a
non-exclusive one year license to Sodak Gaming Corporation to sell the Rainbow
21 game in Indian Owned Casino jurisdictions where lawfully permitted. See
"Business of the Issuer - Rainbow 21 and Material Acquisitions" below.
On September 16, 1997, the Company acquired FET, Inc., a Colorado
corporation ("FET"), for 2,175,456 shares of Common Stock, on the basis of one
share of Common Stock for each outstanding FET share. As a result of this
acquisition, the previous shareholders of FET, as a group, owned more than 50%
of the issued and outstanding voting shares of the Company. Consequently, the
business combination was accounted for as a reverse merger whereby FET was
deemed to have acquired the Company. Accordingly, the accounts of the Company
are based on the accounts of FET at their historic amounts and the
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accounts of the Company at their estimated fair values at the time of the
transaction. See Notes to Consolidated Financial Statements.
The Company has also acquired 11.3% of the outstanding shares of Sega
Gaming Technology, Inc., a Nevada corporation ("SGTI"), which had been acquired
by its management from Sega Enterprises, Ltd. ("Sega of Japan"). SGTI is engaged
under an agency agreement in the distribution and marketing of multi-player
gaming machines based on amusement machines developed by Sega of Japan. See
"Business of the Issuer - Sega Gaming Technology, Inc."
Unless otherwise indicated, the term "Company," includes the Company
and its subsidiaries.
(b) Business of the Issuer
The Company is engaged in the acquisition, design and development of
select gaming products which the Company intends to sell, lease and license,
directly, through independent sales representatives and distributors and through
joint marketing arrangements, in United States and international gaming markets.
The Company's principal products are the Fortune Poker System, a progressive,
multi-player draw poker video game, and the Rainbow 21 casino blackjack game.
The Company has also made a minority investment in Sega Gaming Technology, Inc.
("SGTI"), which was formerly owned by Sega of Japan and is now engaged under an
agency agreement in the distribution and marketing of multi-player gaming
machines based on amusement machines developed by Sega of Japan.
Fortune Poker System. The system was developed by Professional Video
Association, Inc., which was acquired by the Company's Fortune Bahamas
subsidiary effective September 1997. See "Material Acquisitions - PVA" below.
The system enables participants to play electronic poker on a video terminal.
The player may choose to play against the individual machine or against other
players on similar terminals at the same location or remote locations (if such
linkups are permissible under the governing regulatory regime or the contracts
with the gaming facility operator), in each case, for progressively larger
payoffs. The system is under preparation for initial market presentation in
various domestic venues, including Charity Markets, Indian Tribal Casinos,
Riverboat and Shipboard Casinos, Legal Casinos and cardrooms (as a player-banked
game). The Company intends to distribute the product directly, through national
gaming equipment manufacturers, through national or regionally based
distributors, management companies affiliated with Indian Tribal Casinos and
management consultants with ongoing relationships with casino managements. The
Company plans to lease the machines under revenue sharing arrangements with the
operators of gaming establishments. Based on its analysis of the development and
growth potential of the gaming industry and current trends in the regulatory
environment for the gaming industry, the Company also intends to pursue
appropriate business strategies, including manufacturing and/or distribution
joint ventures and strategic alliances, to distribute the Fortune Poker System
in certain international markets.
Rainbow 21. The Company acquired all of the patents and intellectual
property rights related to a modified game of blackjack called "Rainbow 21" in
July 1998. See "Material Acquisitions - Rainbow 21" below. The game is played on
a standard blackjack table with a modified felt layout that permits each of the
six players to wager not only on their own hands but also on any of the other
five hands at once, thus allowing for up to thirty-six decisions per hand. The
game requires only a minimal additional capital
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outlay by gaming operators who wish to install the system and live play
statistics in casinos in Nevada and Mississippi indicate that the Rainbow 21
blackjack table has a hold (win) rate of 23% compared to a 12% hold rate for a
conventional blackjack table in Nevada casinos. Currently, Rainbow 21 has been
approved for casino play in Nevada by the Nevada Gaming Control Board, in
Mississippi by the Mississippi Gaming Commission and in New Jersey by the New
Jersey Gaming Commission. The transfer of the state licenses is subject to
approval by the applicable state regulatory authorities. Applications for such
approval are pending, but no approvals have as yet been obtained. No assurance
can be given as to the timing or costs that may be involved in obtaining such
approvals or whether or whether some or all of such state approvals can be
obtained upon terms and conditions acceptable to the Company or at all.
In August 1998 the Company granted a non-exclusive one year license to
Sodak Gaming Corporation to sell the Rainbow 21 game in Indian Tribal casinos
where lawfully permitted. The agreement provides that Sodak will use its best
efforts to rent or lease the Rainbow 21 game to Indian Tribal casinos for a
minimum monthly rental per game specified in the license. The license provides
Sodak a discount after which the Company would realize $350 per month on the
first 75 games and $300 per month on any additional games.
Sega Gaming Technology, Inc.("SGTI") The Company owns an 11.13% equity
interest in SGTI and has agreed to purchase additional shares which would bring
its total equity interest to 19.08% and result in the Company being the largest
stockholder of SGTI. See "Material Acquisitions - SGTI" below. SGTI was acquired
by its management from Sega of Japan to engage under an agency agreement in the
distribution and marketing of multi-player gaming machines based on amusement
machines developed by Sega of Japan, a worldwide leader in high-tech
entertainment including the manufacture of amusement machines, consumer products
such as home video games and the operation of amusement centers with annual
sales revenues of more than $3.25 billion.
Markets for Gaming Products
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The gaming industry consists of both domestic (North American) and
international markets. Since the early 1980's, slots and video machines have
grown to be the largest revenue generators in casinos. In this same period,
hardware and software advances allowed for application of video graphics to
gaming devices. Using these techniques, International Game Technology (IGT) was
the first company to introduce video poker. Video poker offers an important
advantage over conventional slot machines because video poker is interactive,
allowing the player to decide which cards to hold or discard during the hand.
This feature allows the outcome to be influenced somewhat by the player, an
attribute unavailable in reel-based slot machines.
In the late 1980's, a category of slot machine games called
"Progressives" was introduced and became very popular. The progressive
configuration generally consists of traditional reel-based machines linked
together by a computer network that allows them to share a common jackpot which
is usually much larger than the jackpot that a single, unlinked machine could
support. Progressive jackpots are usually several million dollars, and have
occasionally exceeded $10 million. Progressives may be linked locally within a
bank of a few machines, across an entire casino, or across an entire state. IGT
is the dominant competitor in the Progressives market.
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According to industry sources, casino gaming revenue in the United
States in 1991, 1992 1993, 1994 and 1995 were approximately $9.0 billion, $9.9
billion, $12.6 billion, $14.0 billion and $18.0 billion, respectively, and
continued growth was forecast for 1996, 1997 and 1998. Slot machines, video
gaming machines and similar devices are the dominant source of gaming revenue
for casino operators in most US markets.
The Company believes that the Fortune Poker System has the potential to
become a commercially viable product in the video gaming machine industry. By
allowing progressive play against many other players the system offers the
opportunity for very high payoffs. In addition, the element of skill involved in
choosing cards to throw away within the time limits imposed by the game also
increases player excitement which can enhance casino profits. The system is
under preparation for initial market presentation in various domestic venues,
including Indian Tribal casinos.
Internationally, machines have proven to be appealing to players, but
table games continue to represent the majority of revenues. The legalization of
certain casino and machine gaming occurred in Africa, Eastern Europe and South
America during 1997.
The Company expects to market its products initially in North American
Indian Tribal Casinos, Riverboat and Shipboard Casinos and Charity Markets and
legal card rooms (as a player banked game), followed by the more competitive and
highly regulated North American Legal Casino market and international venues.
The increased legalization and popularity of gaming presents
opportunities in the domestic market (North America) and in the emerging
international market. In the past few years, the introduction of riverboat
gaming in the Midwest U.S., the expansion of Native American Class II and Class
III gaming, the growth in the Nevada market and the growth in Canadian markets
have presented expanded markets for gaming machines.
The rate of growth in the North American marketplace has diminished
since the substantial growth experienced in the early 1990's. During 1997,
several states expressed interest in introducing new gaming legislation. Few of
these states made significant legislative progress toward this goal. Several
states may again pursue approval in 1998. The further expansion of casino-style
gaming in these and any other potential jurisdictions will continue to be the
subject of intense public debate with legalization typically requiring a public
referendum or other legislative action. In addition, any favorable public
referendum or legislative action may be the subject of legal challenges.
These factors have and will continue to influence and potentially delay
the timing and opening of casino-style gaming in new jurisdictions. The Company
cannot predict the rate at which new domestic and international markets will
develop, and any slowdown or delay in the growth of new markets may adversely
affect the Company's future results.
Native American Gaming. Gaming continued to expand on Native American
lands during 1997. Native American gaming is regulated under the National Indian
Gaming Regulatory Act of 1988 ("NIGRA"). The principal goal of the Act was to
promote tribal economic development, self-sufficiency and to ensure honesty and
verifiable accounting. To further these goals, Congress gave tribes the
exclusive right to regulate gaming activity on Indian lands, provided "the
gaming activity is not specifically prohibited by federal law
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and is conducted within a state that does not, as a matter of criminal law and
public policy, prohibit such activity."
The Act separates all gaming activities on Indian reservations
into three classes, each of which is subject to differing degrees and mixes of
tribal, state and federal jurisdiction and regulations:
(i) CLASS I gaming includes traditional Native American
social and ceremonial games and is regulated only by
the tribes.
(ii) CLASS II gaming includes specific games of chance
listed in the statute, and games of skill, but
subject to well-defined structures set forth in the
Act. This class of gaming includes Bingo, pull-tabs,
lotto, punch boards, instant Bingo, and certain card
games played under limited circumstances, and other
games similar to Bingo, if those games are played at
the same location where Bingo is played. In addition,
the statute specifically excludes from Class II (i)
banked card games including Baccarat, Chemin de fer,
or Blackjack, and certain categories of non-banked
card games and (ii) electronic facsimiles of games of
chance or slot machines. CLASS II gaming on Indian
lands is within the exclusive jurisdiction of Indian
tribes.
(iii) CLASS III gaming consists of all forms of gaming that
are not in Class I or Class II, such as video casino
games, slot machines and most table games such as
Blackjack, Craps and Keno. Generally, Class II gaming
may be conducted on Native Indian lands if the state
in which the Native American reservation is located
permits such gaming for any purpose, by any person.
Class III gaming, on the other hand, may only be
conducted pursuant to a compact reached between the
Native American tribe and the state in which the
tribe is located. States which permit Indian gaming
include Arizona, Colorado, Connecticut, Iowa, Kansas,
Louisiana, Michigan, Minnesota, Mississippi, Montana,
Nevada, New Mexico, North Carolina, North Dakota,
Oregon, South Dakota and Wisconsin. Additionally,
Class III compacts are either under consideration, or
there has been ongoing litigation between Native
American tribes and the state governments, in several
other states. The Company cannot, however, predict
when and whether such approvals will occur. In 1997,
11 compacts in the State of New Mexico became
effective. At September 30, 1997, the installed base
of Class III gaming machines within Native American
operations was approximately 78,700 gaming machines.
Riverboat Gaming. Riverboat-style gaming began in Iowa during 1991 and
as of September 1997 was operating in six states. In 1997, the riverboat gaming
installed base was estimated at 84,500 games, operating on more than 85
riverboats.
Cruise Ships. There are approximately 23 registered cruise ship casinos
operating in the United States, principally in the Florida area, but also
located along the East Coast and the Gulf of Mississippi. The cruise ship market
has been estimated to have approximately 15,300 gaming machines in place.
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North American Casino Markets. (i) Nevada. The most established North
American gaming markets are Nevada and Atlantic City. Nevada is both the oldest
and largest market for gaming products with an installed base of approximately
197,200 gaming machines.
(ii) Atlantic City. Atlantic City is the second-largest gaming market
in the Northern Hemisphere. The installed base for the Atlantic City market is
approximately 34,700 gaming machines.
(iii) Canada. Various Canadian provincial governments have approved and
are operating casino-style gaming. The following provinces have casino
operations: Alberta, British Columbia, Manitoba, Nova Scotia, Ontario, Quebec
and Saskatchewan. At the end of fiscal 1997, the total installed base of gaming
machines in the Canadian provinces was approximately 16,600 gaming machines.
The British Columbia market potential could increase in the future with
the proposed addition of gaming at five racetracks, on ten ferry boats, and at
seven destination resorts. The Company cannot predict the completion of these
projects or the level or timing of demand in this market.
Other North American Markets. Colorado and South Dakota offer limited
stakes casino-style gaming throughout specified historic mining towns. Colorado
currently has an installed base of nearly 13,200 gaming machines in the cities
of Black Hawk, Central City and Cripple Creek. South Dakota has an installed
gaming machine base of nearly 2,400 machines in Deadwood.
International Markets. Demand for gaming products also exists in
international jurisdictions. Traditionally, gaming in international markets has
consisted of both casino-style gaming, private clubs and, in some countries,
smaller-scale gaming halls. International casinos commonly target the tourist
population and are usually located in large urban areas or designated tourist
locations. The number of large-scale casinos per jurisdiction may be limited by
the government. The casinos may be privately-owned, government-owned or a joint
venture between the state and a private operator. Frequently, the investment in
these facilities is significant and therefore often managed by world-wide casino
operators. In addition, there are corporate and charity-run operations.
The number of machines within gaming halls is usually fewer than what
is found in casinos and it is common to find numerous halls located throughout a
jurisdiction. The types of games within the halls can include
amusement-with-prize machines ("AWP") as well as gaming machines. In some
jurisdictions, the machines pay out in the form of tickets, vouchers or tokens,
rather than actual coins. These gaming establishments are usually privately
owned and, due to the smaller size of the locations, the investment required is
significantly less than that for casino developments.
(i) Australia and New Zealand. The Australian market is the most
established jurisdiction for gaming products outside of North America.
Casino-style gaming has existed in Australia since 1973 and in the pub and club
market since 1956. Currently, a total of 14 casinos operate in Australia within
the states of New South Wales, the Northern Territory, Queensland, South
Australia, Tasmania, Victoria, and Western Australia. The installed base for the
Australian market (including New Zealand) is approximately 160,000 gaming
machines in legalized casinos, pubs and clubs.
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Gaming also exists in New Zealand in the form of casino-style gaming
and gaming in pubs and clubs. Casino-style gaming was introduced in New Zealand
during fiscal 1995, with the commencement of operations at the Christchurch
Casino. The installed base for all sectors of the New Zealand market is
approximately 13,000 gaming machines. The Company cannot predict the timing or
level of demand in this market in the future.
(ii) The United Kingdom and Germany. The United Kingdom's coin machine
business is dominated by low level gambling machines in what is one of the most
stable AWP markets in Europe. There are in excess of 20,000 skill games with
prizes placed in pubs, amusement centers, bingo clubs and arcades, with more
than 40% of these machines presently located in pubs. These are in addition to
standard amusement machines, including pinball and video, which realize a high
level of play. The German amusement industry includes 240,000 machines located
in arcades across the country which currently generate annual gross revenues of
approximately $4 billion.
(iii) South Africa. In 1996, the Government of South Africa took steps
to expand legalized gaming with the passing of national legislation. The gaming
legislation in South Africa permits the nine provinces to license a total of 40
casinos. The market is divided by province, with each of the nine provinces
determining the timing and granting of the licenses. There are currently 17
licensed casinos in the country, although it is anticipated that at least eight
of the existing operations will be required to close under the provisions of the
National Gambling Act.
The nine South African provinces are in various stages of implementing
the provisions of the National Gambling Act. The National Gambling Act and most
of the provincial gambling bills also authorize limited payout gaming machines
("LPM") (limited in number, wager and payout) in other venues such as bars,
taverns, and social or sports clubs. Licensing will be available for operators
in both casino style and LPM gaming. All suppliers must be licensed and meet
technical specifications in the gaming markets. The specific limitations will be
defined in each province's regulations.
Notwithstanding the growth of domestic and international gaming
markets, there can be no assurance that the Company will be able successfully to
commercialize its gaming products. The Company has not as yet realized any
commercial revenues from its products and faces substantial competition in the
gaming industry from numerous much larger, better established and better
financed competitors.
Marketing and Sales
The Fortune Poker System is a modular device and, consequently, as its
popularity builds, additional units can be added to the system. The Company is
actively working to build up a distribution network across North America and
believes that it will be able to increase the rate of expansion as distribution
and knowledge of the game increases.
The most significant factor influencing the purchase of all types of
gaming machines is player appeal followed by a mix of elements including
service, price, reliability, technical capability and the financial condition
and reputation of the manufacturer. Player appeal is key because it combines the
machine design, hardware, software and play features that ultimately improve the
earning power of gaming machines and the customer's return on investment.
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Competition
In order to achieve commercial sales of its gaming products, the
Company must competes with many well-established U.S. and foreign manufacturers
in the gaming machine market. The primary competitors in the gaming machine
industry are Bally Gaming, Inc., a subsidiary of Alliance Gaming Corporation,
International Game Technology and Sigma Game, Inc. Somewhat smaller but
nevertheless well-established gaming machine manufacturers include Anchor,
Aristocrat, Casino Data Systems ("CDS"), Silicon Gaming, Inc., Video Lottery
Consultants, Inc., a subsidiary of Video Lottery Technologies, Inc., and WMS
Industries, Inc. All of these companies have developed gaming products and are
either authorized to sell products or are in the licensing process in many U.S.
gaming jurisdictions. There are several competitors for the international
markets including Aristocrat, Atronic, Cirsa, Franco and Novomatic. All of the
Company's principal competitors are significantly larger, well established in
the gaming industry and are better capitalized than the Company, all of which
factors could adversely affect the Company's ability to compete.
While there are a variety of electronic and traditional gaming
alternatives to the Fortune Poker and Rainbow 21 Blackjack games, the Company
believes that the Fortune Poker System and Rainbow 21 games generate high levels
of player involvement, a principal basis for competition in the gaming industry.
However, the commercial success of the Company's product may encourage the
Company's competitors to develop similar products which may be comparable or
superior to the Company's products.
Year 2000
The Company has conducted a review to identify, evaluate and implement
changes to computer systems and applications necessary to achieve a year 2000
date conversion with no effect on customers or disruption to business
operations. The Company will also be communicating with suppliers, financial
institutions and others with which it conducts business to coordinate year 2000
conversions. The total cost of compliance and its effect on the Company's future
results of operations will be determined as a part of this project. Based on
initial review, the total cost is not expected to have a material effect on the
Company's results of operation or financial statements. However, there can be no
assurance that the systems of other companies on which the Company may rely will
be timely converted or that such failure to convert by another company would not
have an adverse effect on the Company's systems.
Material Acquisitions
Fortune Entertainment Corporation (Bahamas). In October, 1997, the
Company acquired all of the issued and outstanding shares of Fortune
Entertainment Corporation, a Bahamas corporation ("Fortune Bahamas") in exchange
for 1,090,464 shares of the Company's Common Stock, 1,090,464 shares of the
Company's Series A Preferred Stock, 1,090,464 shares of the Company's Series B
Preferred Stock, 1,090,464 shares of the Company's Series C Preferred Stock.
Each share of Series A and Series B Preferred Stock is convertible into one
share of Common Stock. Each share of the Series C Preferred Stock is convertible
into one share of Common Stock commencing November 20, 1998.
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Professional Video Association, Inc. Effective September 1997, the
Company acquired Professional Video Association, Inc., a Maine corporation
("PVA") pursuant to a Purchase and Sale Agreement between the Company's
subsidiary, Fortune Bahamas, and Video Lottery Consultants, a Maine corporation
("VLC") and William M. Danton ("Danton", together with VLC, the "Danton Group")
dated September 5, 1997 and amended January 27, 1998, January 29, 1998, March
12, 1998 and July 9, 1998 (the "PVA Agreement") for a consideration of 1,647,500
shares of Common Stock, a cash payment of $706,986 made on June 30, 1998 and
remaining cash payments, secured by the stock of PVA, of $250,000 due October
30, 1998, $250,000 due December 30, 1998 and $205,000 due March 30, 1999. The
Company also issued an additional 200,000 shares of Common Stock in payment of a
finder's fee in connection with the transaction. PVA was originally formed to
take advantage of the patent rights (the "Intellectual Property") of a video
poker game software known as PVA Electronic Tournament Poker ("Fortune Poker").
In addition, the PVA Agreement provides for the payment to the Danton Group of
20% of all up front licensing fees paid to the Company. Commencing 120 days
after the Company's first fiscal year ending after November 25, 1997 (the
"Trigger Date") and for every year thereafter until the expiration of the
patent(s) constituting the Intellectual Property, the Company is obligated to
issue Common Stock to Danton equivalent to certain predetermined percentages
(ranging from 2% in year 1 to 10% when net earnings before income tax,
depreciation and amortization from the Intellectual Property are at least
$10,000,000) times net earnings divided by the average share price of the Common
Stock trading on the Bulletin Board for the last thirty trading days of the
fiscal year.
The PVA Agreement requires the Company to file a registration statement
with the Securities and Exchange Commission so that the 1,647,500 shares of
Common Stock issued to the Danton Group will be available for public sale no
later than February 28, 1999 and also provides that if during the period
commencing on the date (the "Trading Date") when all of the stock issued is
fully registered under the Securities Act of 1933 as amended, and freely
transferable and not subject to restrictions on transferability of any kind
whatsoever, and ending on a date sixty (60) days after the Trading Date (the
"60th Day"), the shares of the Company trading on the Bulletin Board have not
for forty-five (45) days had a closing bid price per share of at least $2.00 on
the Bulletin Board, then, to the extent the stock is held on the 60th Day by the
assigned holders or their respective family members or affiliates, the Company
shall pay to such holder or holders, or any portion thereof, for each such share
of the Company, the difference between (A) $2.00 and (B) the greater of $0.50
and the average bid closing price of the Common Stock trading on the Bulletin
Board for the ten (10 days preceding the 60th Day (the "Average Price"). The
Company agreed to pay such difference on or before June 9, 1999 in cash, or, at
the Company's option, in stock. The Company also agreed to cause such stock to
be fully registered under the Securities Act of 1933 as amended and freely
transferable with no restrictions on transferability of any kind whatsoever
within 180 days of issuance of any stock by the Company. If the Company elects
to issue such stock for the difference, the number of shares to be issued shall
be determined by dividing the difference by the Average Price.
If the Company fails to meet its obligations described above to
register its Common Stock or to make cash payments, the agreements provide that
the Danton Group has the right to recover 60% of the PVA stock without cost and
(ii) acquire the remaining 40% of the PVA stock by returning to the Company all
except 147,500 of the 1,647,500 shares of the Company's Common Stock delivered
by the Company, and all of the cash payments made by the Company, in payment of
the purchase price for PVA. Until the Company satisfies these conditions, the
Company has agreed that it will not change its bylaws or certificate of
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incorporation; sell, convey or transfer any of the assets associated with the
purchase agreement; or incur any debt, liability or other obligation outside of
the ordinary course of business without the prior written consent of the Danton
Group.
Pursuant to the PVA Agreement, the Company acquired PVA's rights under
a Manufacturing Agreement and Software Release Agreement with Amusement World,
Inc. Under the agreement, Amusement World, Inc. is granted the exclusive right
to manufacture PVA terminals for the Company until April 23, 2007. The cost to
the Company for each PVA terminal will range from $2,700 to $3,600 depending
upon the type of terminal ordered by the Company. The cost of the PVA terminals
will increase based upon increases in the Consumer Price Index. In the event the
Company defaults in any of its obligations under the Manufacturing Agreement,
the Company is required to assign its rights under the Manufacturing Agreement
and the Software release Agreement to the Danton Group.
Sega Gaming Technology, Inc. Pursuant to an agreement among the
Company, Andrew Kaneb and Marcela G. Kaneb dated April 9, 1998 and a separate
agreement among the Company and three other shareholders of Sega Gaming
technology, Inc. ("SGTI") dated June 12, 1998 (collectively, the "SGTI
Agreements"), the Company has acquired 131,250 shares, or 11.13%, of the common
stock of SGTI for a total consideration of $1,071,250. The Company has agreed to
acquire an additional 31,250 shares of SGTI on September 30, 1998 for a
consideration of $279,688 and a further 62,500 shares on October 15, 1998 for a
consideration of 559,375. On the completion of these transactions, the Company
will be the largest single shareholder of SGTI, owning 225,000 shares
representing a 19.08% equity interest in SGTI. See "Business of the Issuer"
above.
Team Rainbow. Pursuant to various agreements as most recently amended
by a Purchase and Sale Agreement dated July 22, 1998 (the "TR Agreement"), the
Company acquired all of the rights, assets (including intellectual property
rights), and business of Team Rainbow relating to a multi-positional blackjack
game known as "Rainbow 21". The purchase price is as follows:
Cash: $272,500;
Shares: 250,000 shares of the Common Stock;
The agreement provides that, if during the last five trading days in
the twelfth month after the Option Exercise Date (as such term is defined in the
TR Agreement), the simple average closing price for the shares on the public
market on which they are traded (the "Market Price") does not equal or exceed
$2.25 per share, the Company shall either:
1. pay to Team Rainbow the difference between $562,500 and
250,000 multiplied by the Market Price (the "Difference"), or
2. deliver to Team Rainbow additional shares of the same class as
the shares having a value equal to the Difference, with such
additional shares being valued at the Market Price.
Rainbow 21 is patented under US Patent Number 5,390,934 on February 21,
1995 and the artwork (graphics) is patented under US Patent No. 5,494,296 dated
February 27, 1996. See "Business of the Issuer - Rainbow 21" above.
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Manufacturing and Suppliers
Under the terms of an Assignment of Software Release Agreement between
the Danton Group (as the Assignor) and the Company's Fortune Bahamas subsidiary
and the terms of an Assignment of Manufacturing Agreement between Video Lottery
Consultants ("VLC") and Fortune Bahamas dated July 14, 1998 (collectively, the
"Supply Assignment Agreements"), the Company has been assigned the rights to
receive the supply of the terminals for the Fortune Poker System under the
Manufacturing Agreement dated April 24, 1997 between Amusement World, Inc.
("AWI") and VLC, and the rights to the accompanying software under the Software
Release Agreement by and among Stephen D. Honiker, AWI and Danton.
Patents, Copyrights and Trade Secrets
The Company relies on a combination of patent, trade secret, copyright
and trademark law, non-disclosure agreements, and technical security measures to
protect its products. Notwithstanding their safeguards, it is possible for
competition of the Company to obtain its trade secrets and to imitate its
products. Furthermore, others may independently develop products similar or
superior to those developed or planned by the Company. While the Company may
obtain patents with respect to certain of its products, the Company may not have
sufficient resources to defend such patents, such patents may not afford all
necessary protection and competitors may develop equivalent or superior products
which may not infringe such patents.
The Company's intellectual property includes United States Patent No.
4,648,604 (the Fortune Poker Patent), expiring 2004, United States Patent No.
5,390,934 dated February 21, 1995 (the "Rainbow 21 Patent"), expiring April 11,
2003, and United States Patent No. 5,494,296 dated February 27, 1996 (the
Rainbow 21 Graphics Patent"), expiring February 5, 2015.
Employees
As at July 31, 1998 the Company had eight (8) full-time employees, none
of whom is represented by any labor union.
Government Regulation
The Company's operations are subject to state and local gaming laws as
well as various federal laws and regulations governing business activities with
Native American tribes. The state and local laws in the United States which
govern the lease and use of gaming products are widely disparate and continually
changing due to legislative and administrative actions and judicial
interpretations. If any changes occur in gaming laws through statutory enactment
or amendment, judicial decision or administrative action restricting the
manufacture, distribution or use of some or all of the Company's products, the
Company's present and proposed business could be adversely affected. The
operation of gaming on Native American reservations is subject to the NIGRA.
Under NIGRA, certain types of gaming activities are classified as Class I, Class
II or Class III. The Company's business will be impacted, based upon how its
products are ultimately classified (See "Markets for Gaming Products-Native
American Gaming").
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Nevada Regulation. The manufacture, sale and distribution of gaming
devices in Nevada are subject to extensive state laws, regulations of the Nevada
Gaming Commission and State Gaming Control Board (the "Nevada Commission"), and
various county and municipal ordinances. These laws, regulations and ordinances
primarily concern the responsibility, financial stability and character of
gaming equipment manufacturers, distributors and operators, as well as persons
financially interested or involved in gaming operations. The manufacture,
distribution and operation of gaming devices require separate licenses. The
laws, regulations and supervisory procedures of the Nevada Commission seek to
(i) prevent unsavory or unsuitable persons from having a direct or indirect
involvement with gaming at any time or in any capacity, (ii) establish and
maintain responsible accounting practices and procedures, (iii) maintain
effective control over the financial practices of licensees, including
establishing minimum procedures for internal fiscal affairs and the safeguarding
of assets and revenues, providing reliable record keeping and requiring the
filing of periodic reports with the Nevada Commission, (iv) prevent cheating and
fraudulent practices, and (v) provide a source of state and local revenues
through taxation and licensing fees. A Nevada gaming licensee is subject to
numerous restrictions. Licenses must be renewed periodically and licensing
authorities have broad discretion with regard to such renewals. Licenses are not
transferable. Each type of machine sold by the Company in Nevada must first be
approved by the Nevada Commission, which may require subsequent machine
modification. Substantially all material loans, leases, sales of securities and
similar financing transactions must be reported to or approved by the Nevada
Commission. Changes in legislation or in judicial or regulatory interpretations
could occur which could adversely affect the Company.
The Company is not licensed by Nevada as a gaming machine manufacturer
nor has the Fortune Poker video poker machine been licensed as an authorized
gaming machine by Nevada authorities. Although the Company intends initially to
markets the Fortune Poker system in the Native American Tribal Casino, Charity
and Riverboat and Cruise Ship markets, the failure of the Company or the Fortune
Poker system to meet Nevada licensure standards and obtain applicable Nevada
licenses would prevent the sale or marketing of the system in Nevada and could
have a material adverse effect on the Company's ability to market its products
in other markets. While the Company anticipates that it will meet Nevada
standards, there can be no assurance that it will in fact be able to do so.
Other Jurisdictions. Many other jurisdictions which represent potential
markets for the Company's products require various licenses, permits, and
approvals in connection with the manufacture and/or the distribution of gaming
devices, and operation of progressive systems, typically involving restrictions
similar in most respects to those of Nevada.
No assurances, however, can be given that such required licenses,
permits or approvals will be given or renewed in the future.
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RISK FACTORS
In addition to other information contained elsewhere in this document,
the reader of this registration statement on Form 10-SB should consider
carefully the factors set forth below.
Limited Relevant Operating History; Historical Losses
The Company has engaged only in the acquisition and development of gaming
products, principally the Fortune Poker System and the Rainbow 21 blackjack
game, but has not as yet sold any product or derived any revenue. To date, the
Company's only source of funds for its activities has been proceeds from the
sale of securities. See "Recent Sales of Unregistered Securities." Consequently,
the Company has no relevant operating history upon which an evaluation of its
prospects can be made. Such prospects must be considered in light of the risks,
expenses and difficulties frequently encountered in connection with the
operation and expansion of a new business and commercialization of new products,
particularly those associated with the rapidly evolving and highly regulated
gaming industry, which is characterized by an increasing number of market
entrants, intense competition and substantial capital requirements. In addition,
the Company has experienced significant losses since its inception in August
1997, due primarily to overhead and other costs incurred in the development and
acquisition of products, and resulting in an accumulated deficit of $2,472,675
at June 30, 1998. Moreover, the Company expects to incur substantial up-front
expenditures and operating costs in connection with the expansion of its
marketing efforts and product lines, which are expected to result in additional
losses. There can be no assurance that the Company will be able to successfully
implement its business strategies, that it will achieve revenues or that it will
ever be able to achieve or sustain profitable operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Consolidated Financial Statements.
Significant Capital Requirements; Negative Cash Flow; Possible Need for
Additional Financing
The Company's capital requirements have been and will continue to be
significant, and, to date the Company has not realized any revenues from
operations. Since inception, the Company's only source of funds has been
proceeds from the sale of its securities. See "Recent Sales of Unregistered
Securities." The Company has been dependent on private financings and the
issuance of its equity securities to fund all of its capital and operating
requirements. As a result, the Company is dependent upon raising additional
capital to complete the development of its currently proposed products and fund
its business strategies. The Company has no current arrangements with respect
to, or potential sources of, any additional financing, and it is not anticipated
that existing shareholders will provide any portion of the Company's future
financing requirements. Consequently, there can be no assurance that any
additional financing will be available to the Company when needed, on
commercially reasonable terms, or at all. Any inability to obtain additional
financing when needed would require the Company to delay or scale back its
product development and marketing programs, which could have a material adverse
effect on the Company. In addition, any additional equity financing may involve
substantial dilution to the interests of the Company's then existing
shareholders.
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Fluctuations in Quarterly Operating Results; Uncertainty of Future Results
The Company's operating results will likely fluctuate significantly in the
future depending on a variety of factors, several of which are not in the
Company's control. Such factors include the demand for the Company's products
and the products of its competitors, the size and rate of growth of the gaming
machine market, development and promotional expenses related to the introduction
of new products or enhancements, the degree of market acceptance for the
Company's product introductions and enhancements, the timing of orders from
significant customers, delays in shipment, the level of price competition,
quality problems, the length of product life cycles, the percentage of the
Company's sales related to international sales and changes in personnel. Net
revenues in any quarter are expected to be substantially dependent on orders
booked and shipped in that quarter. A significant portion of the Company's
operating expenses is relatively fixed, and planned expenditures are primarily
based on expectations regarding future sales; as a result, operating results in
any given quarter would be disproportionately adversely affected by a decrease
in sales or a failure to meet the Company's sales expectations. Operating
results for future periods are subject to numerous uncertainties, and there can
be no assurance that the Company will become profitable or sustain profitability
on an annual or quarterly basis.
Dependence On a Limited Number of Products
To date, the Company has focused it efforts principally on the
commercialization of two products -- the Fortune Poker System and the Rainbow 21
blackjack game. Due to this concentration on a limited number of products, the
Company may be adversely affected if one or more of its principal products fails
to achieve anticipated results. The Company has not realized any revenue as of
yet from the sale of either of these products. There can be no assurance that
the Company will not remain dependent upon a limited number of products for a
substantial portion of its revenues or that any products introduced by the
Company will be commercially viable. Failure to continuously acquire and develop
and introduce new, commercially successful products would have a material
adverse effect on the Company. See "Business -- Principal Products."
Dependence on Third Parties for New Products.
Because the Company's principal products have, to date, been developed by
and acquired from third parties, the Company may not be able to control the
timing of the development and introduction of additional new products. There can
be no assurance that the Company will be able to successfully develop internally
or acquire from others any additional new products on a timely basis.
Intense Competition
The gaming machine industry is intensely and increasingly competitive.
Industry competition is based primarily upon product quality and features, the
access to distribution channels, marketing effectiveness, reliability and ease
of use, price and the quality of customer support services. Many of the
companies with which the Company expects to compete or may compete against have
greater financial, technical, marketing, sales and customer support and other
resources than the Company and have established reputations for
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success in the development, licensing and sale of their products and technology.
Current and future competitors with greater financial resources than the Company
may be able to carry larger inventories, undertake more extensive marketing
campaigns, adopt more aggressive pricing policies and make higher offers or
guarantees to third party developers and licensors than the Company. As
competition increases, even if the Company achieves successful commercialization
of its initial products, significant price competition, increased production
costs and reduced profit margins may result. There can be no assurance that the
Company will be able to compete successfully against current or future
competitors or that competitive pressures faced by the Company will not have a
material adverse effect on its future operations.
Ability to Manage and Sustain Growth; Risks Associated with Future Acquisitions
In addition to internal growth, the Company intends to evaluate, on an
ongoing basis, additional acquisitions of, or investments in, other developers
of gaming machines and related intellectual property or other businesses which
the Company believes will complement or enhance its business strategy. The
success of such strategy thus will depend upon, among other things, the
Company's ability to hire and retain skilled management, marketing, technical
and other personnel and to successfully manage growth (which also will require
it to develop and improve upon its operational, management and financial systems
and controls in order to properly monitor its expanded operations, control its
costs and maintain effective quality controls). There can be no assurance that
the Company will be able to expand its operations or that it will be able to
effectively manage any such expansion or anticipate and satisfy all of the
changing demands and requirements that growth will impose upon its operations.
In addition, acquisitions involve numerous additional risks, including
difficulties in the assimilation of the operations and products of the acquired
companies, the expenses incurred in connection with the acquisition and
subsequent assimilation of operations and products, the diversion of
management's attention from other business concerns and the potential loss of
key employees of the acquired company. Acquisitions of foreign companies also
may involve the additional risks of assimilating differences in foreign business
practices and overcoming language barriers. If the Company consummates any
acquisition in the future, there can be no assurance that the Company will be
able to integrate the acquired operations successfully, and any inability to do
so could adversely affect the Company's business.
In addition, while the Company will explore acquisitions of businesses and
assets that it believes are compatible with its business strategy and regularly
evaluates possible acquisition opportunities, as of the date of this
registration statement, the Company has no current agreements, commitments,
understandings or arrangements with respect to any potential acquisition.
Consequently, there is no basis for stockholders to evaluate the specific merits
or risks of any potential acquisition that the Company may undertake. Moreover,
under Delaware law, various forms of business combinations can be effected
without shareholder approval; accordingly, stockholders will, in some instances,
neither receive nor otherwise have the opportunity to evaluate any financial or
other information which may be made available to the Company in the future in
connection with any acquisition and must rely entirely upon the ability of
management in selecting, structuring and consummating acquisitions that are
consistent with the Company's business objectives. Although the Company will
endeavor to evaluate the risks inherent in a particular acquisition, there can
be no assurance that the Company will properly ascertain or assess all
significant risk factors prior to consummating any acquisition.
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Government Regulation
The Company's operations are subject to state and local gaming laws as
well as various federal laws and regulations governing business activities with
Native American tribes. The state and local laws in the United States which
govern the lease and use of gaming products are widely disparate and continually
changing due to legislative and administrative actions and judicial
interpretations. If any changes occur in gaming laws through statutory enactment
or amendment, judicial decision or administrative action restricting the
manufacture, distribution or use of some or all of the Company's products, the
Company's present and proposed business could be adversely affected.
The operation of gaming on Native American reservations is subject to
the Native Indian Gaming Regulations Act ("NIGRA"). Under NIGRA, certain types
of gaming activities are classified as Class I, Class II or Class III. The
Company's business will be impacted, based upon how its products are ultimately
classified.
The Company is not licensed as a game manufacturer by, nor is its
Fortune Poker system licensed for sale as a gaming machine in, Nevada, New
Jersey or any other state regulatory jurisdiction. The Company intends to make
application for such licenses, but there can be no assurance when, if ever, such
licenses will be granted. The inability of the Company to obtain applicable
state licenses, particularly in Nevada and New Jersey, could have a material
adverse effect upon the Company.
Dependence on Third-Party Distribution Channels
The Company intends to sell its gaming products to a significant extent,
through independent distributors and in joint ventures with independent
distributors. Sales of the Company's products to or through a limited number of
distributors are expected to comprise a significant portion of the Company's net
revenues when such revenues are achieved.
The loss of, or a significant reduction in sales attributable to, one
or a small number of significant distributors, in the absence of comparable new
relationships or the development of independent means of marketing and
distributing the Company's products, could have a material adverse effect on the
Company's revenues and operating results. In addition, a payment default by a
significant distributor could have a material adverse effect on the Company's
business, operating results and financial condition.
Dependence on Key Personnel
The Company's success depends to a significant extent on the performance
and continued service of its senior management and certain key employees.
Competition for highly skilled employees with technical, management, marketing,
sales, product development and other specialized training is intense, and there
can be no assurance that the Company will be successful in attracting or
retaining such personnel. Specifically, the Company may experience increased
costs in order to attract and retain skilled employees. Although the Company
generally enters into term employment agreements with its senior management,
there can be no assurance that such employees or any other employees will not
leave the
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Company or compete against the Company. The Company's failure to attract or
retain qualified employees could have a material adverse effect on the Company's
business, operating results and financial condition.
Risks Related to International Revenues and Operations
While the Company intends initially to emphasize the Native American Tribal
gaming market, the Company intends ultimately to distribute its products
internationally. International operations and sales of products are subject to
inherent risks, including fluctuations in exchange rates, the impact of possible
recessionary environments in economies outside the United States, the costs of
transferring and localizing products for foreign markets, longer accounts
receivable collection periods and difficulty in collection of accounts
receivable, unexpected changes in regulatory requirements, tariffs and other
barriers, difficulties and costs of staffing and managing foreign offices and
potential political and economic instability. Revenues and expenses from foreign
operations generally are denominated in local currencies, and, as a result,
exchange rate fluctuations between such local currencies and the U.S. dollar
will subject the Company to currency translation risk from the reported results
of its foreign operations. There can be no assurance that the Company will be
able to establish or thereafter maintain or increase international market demand
for its products or that these or other factors will not have a material adverse
effect on the Company's future international sales and, consequently, on the
Company's operating results.
Manufacturing Risks
The Company does not manufacture its own products, but is dependent on a
single third party manufacturer for the Fortune Poker System and on other third
party manufacturers for the Rainbow 21 game. See "Business of the Issuer --
Manufacturing and Suppliers." While these services are available from multiple
parties and at multiple sites, there can be no assurance that an interruption in
the manufacture of the Company's products will not occur and, if it does occur,
that it could be remedied without undue delay or without a material adverse
effect on the Company's operations.
Concentration of Ownership
The Company's executive officers, directors and affiliated entities and
persons own beneficially approximately 26.5% of the outstanding shares of Common
Stock. Accordingly, such persons and entities will be in position to influence
the election of the Company's directors and the outcome of corporate actions
requiring shareholder approval. The concentration of ownership may have the
effect of delaying or preventing a change in control of the Company. See
"Management," "Security Ownership of Certain Beneficial Owners and Management"
and "Directors, Executive Officers, Promoters and Control Persons."
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Sporadic Market for the Common Stock; Possible Volatility of Stock Price; Risk
of Delisting from Over the Counter Bulletin Board.
Trading in the shares of the Company's Common Stock has been sporadic, and
there can be no assurance that an active and liquid trading market will develop
or be sustained. The market price of the Company's Common Stock could therefore
be subject to wide fluctuations in response to variations in quarterly operating
results and other factors, such as announcements of new products by the Company
or its competitors and failures to meet or exceed the expectations of securities
analysts or investors or other events. In addition, in order to maintain
eligibility for continued trading on the Over the Counter Bulletin Board, at
least two market makers must maintain a market for the Company's Common Stock.
If at any time this requirement is not maintained, the Company's Common Stock
could be delisted from the Bulletin Board which could adversely affect the
liquidity of the market for the Company's Common Stock.
Risk of Low Priced Stocks
Rules 15g-1 through 15g-9 promulgated under the Securities Exchange Act
of 1934 (the "Exchange Act") impose sales practice and disclosure requirements
on certain brokers and dealers who engage in certain transactions involving "a
penny stock."
Currently, the Company's Common Stock is considered penny stock for
purposes of the Exchange Act. The additional sales practice and disclosure
requirements imposed on certain brokers and dealers could impede the sale of the
Company's Common Stock, including securities purchased in any offering by the
Company or in the secondary market. In addition, the market liquidity for the
Company's securities may be severely adversely affected, with concomitant
adverse effects on the price of the Company's securities.
Under the penny stock regulations, a broker or dealer selling penny
stock to anyone other than an established customer or "accredited investor"
(generally an individual with net worth in excess of $1,000,000 or annual
incomes exceeding $200,000 or $300,000 together with his or her spouse) must
make a special suitability determination for the purchaser and must receive the
purchaser's written consent to the transaction prior to sale, unless the broker
or dealer or the transaction is otherwise exempt. In addition, the penny stock
regulations require the broker or dealer to deliver, prior to any transaction
involving a penny stock, a disclosure schedule prepared by the Securities and
Exchange commission (the "SEC") relating to the penny stock market, unless the
broker or dealer or the transaction is otherwise exempt. A broker or dealer is
also required to disclose commissions payable to the broker or dealer and the
registered representative and current quotations for the securities. In
addition, a broker or dealer is required to send monthly statements disclosing
recent price information with respect to the penny stock held in a customer's
account and information with respect to the limited market in penny stocks.
Lack of Trademark and Patent Protection
The Company relies on a combination of patent, trade secret, copyright
and trademark law, non-disclosure agreements, and technical security measures to
protect its products. Notwithstanding these safeguards, it is possible for
competitors of the Company to obtain
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its trade secrets and to imitate its products. Furthermore, others may
independently develop products similar or superior to those developed or planned
by the Company. While the Company may obtain patents with respect to certain of
its products, the Company may not have sufficient resources to defend such
patents. Such patents may not afford all necessary protection and competitors
may develop equivalent or superior products, which may not infringe such
patents. See "Business-Patents and Trademarks".
Dividends
The Company has never paid any cash dividends on its Common Stock and does
not anticipate paying cash dividends in the foreseeable future as it intends to
retain any net income for use in connection with the expansion of its business.
Shares Eligible for Future Sale; Registration Rights
Sales of substantial amounts of Common Stock in the public market could
adversely affect prevailing market prices for the Common Stock. As of July 31,
1998, the Company has 10,593,020 shares of Common Stock outstanding. Of these
shares, 5,184,020 shares are either freely tradable without restrictions or
further registration under the Securities Act of 1933, as amended (the
"Securities Act"), or are held by "affiliates" of the Company, as that term is
defined in Rule 144 under the Securities Act, who will be able to re-sell such
shares following the effectiveness of the registration of the Company's Common
Stock under the Securities Exchange Act of 1934 subject to certain requirements
and resale limitations imposed by Rule 144 of the Securities and Exchange
Commission promulgated under the Securities Exchange Act of 1934, as amended.
All of the remaining 5,409,000 shares of Common Stock outstanding are
"restricted securities" within the meaning of Rule 144. Of such restricted
securities, 1,500,000 shares are subject to certain registration rights. No
prediction can be made as to the effect, if any, that sales of such freely
tradable or registrable securities or the availability of such securities for
sale will have on the market prices prevailing from time to time. The
possibility that a substantial number of the Company's securities may be sold in
the public market may adversely affect prevailing market prices for the Common
Stock and could impair the Company's ability to raise capital through the sale
of its equity securities.
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Contingent Payments Under Acquisition Agreements; Covenant to Register Shares
Issued in Acquisitions
Under the agreements to acquire the Fortune Poker system and the
Rainbow 21 blackjack game, the Company has undertaken to issue additional shares
or make cash payments (i) with respect to the 1,647,500 shares issued in the
Fortune Poker acquisition, if the trading price for the shares during a 60 day
period specified in the agreement is less than $2.00 per share or (ii) with
respect to the 250,000 shares issued in the Rainbow 21 acquisition, if the
trading price for the shares during a 60 day period specified in the agreement
is less than $2.25 per share. In addition, if the Company is in breach of the
foregoing obligation with respect to the shares issued in the Fortune Poker
acquisition or if such shares of Common Stock are not freely tradable by
February 28, 1999, then the sellers have the right (i) without further payment,
to re-acquire 60% of the stock of the Fortune Poker subsidiary and/or (ii) to
acquire the remaining 40% of the stock of the Fortune Poker subsidiary by
returning to the Company all but 147,500 of the 1,647,500 shares of the
Company's Common Stock delivered by the Company and all of the cash payments
made by the Company for the purchase of the Fortune Poker subsidiary.
The possible issuance of a large number of shares of Common Stock
pursuant to the agreements described in the preceding paragraph and the possible
availability of such shares of stock for sale could have an adverse effect on
market prices prevailing from time to time for the Common Stock and may impair
the Company's ability to raise capital through the sale of equity securities. In
addition, the exercise by the sellers of the Fortune Poker system, in whole or
in part, of their remedy for breach of the Company's registration and stock
issuance agreements could have a material adverse effect on the Company.
Forward-Looking Information May Prove Inaccurate
This registration statement contains various forward-looking statements
that are based on the Company's beliefs as well as assumptions made by and
information currently available to the Company. When used in this registration
statement, the words "believe," "expect," "anticipate," "estimate" and similar
expressions are intended to identify forward-looking statements. The accuracy of
such forward-looking statements is subject to certain risks, uncertainties and
assumptions, including those identified above under "Risk Factors." Should one
or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated, or projected. The Company cautions potential purchasers
not to place undue reliance on any such forward-looking statements.
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Item 2. Management's Discussion and Analysis or Plan of Operation.
The following discussion and analysis of financial conditions, results
of operation and plan of operation should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included elsewhere in this
form 10-SB.
General
The Company has has completed the acquisitions of the Fortune Poker and
Rainbow 2ITM games which form the core products of the Company's business. The
Company's plan is to develop these two businesses into revenue and profit
producing operations.
Rainbow 21. The Company has entered into a distribution agreement for
its Rainbow 21 Blackjack game with Sodak Gaming Inc. ("Sodak") which grants
Sodak has the non-exclusive right to market Rainbow 21 to Native Indian Gaming
throughout North America. The Company's marketing goal is to achieve an initial
5% penetration into approximately 10,000 Blackjack gaming tables in the United
States. Average recurring lease revenue is projected to be approximately $380.00
per table, after distribution costs.
Fortune Poker. The Company demonstrated the Fortune Poker System game
and equipment at the World Gaming Show held in Las Vegas September 23-25, 1998.
The Company is preparing a detailed plan including a production time-line, costs
and delivery schedule and comprehensive marketing arrangements to launch the
Fortune Poker product in the United States market at and following the World
Gaming Show. The Company is also in negotiations with several parties interested
in distributing Fortune Poker, much in the same manner as the Sodak agreement
for Rainbow 21.
The Company has not, to date, generated any revenues from product
distribution nor does its plan contemplate such revenues until the 1999 fiscal
year. Accordingly, the Company has since inception funded its operations and
capital expenditures primarily through private placements of debt and equity
securities. See "Recent Sales of Unregistered Securities". The Company will be
required to seek additional financing in the future to execute its business
plan. There can be no assurance that such financing will be available at all, or
available on terms acceptable to the Company. The Company's products are in the
early stage of commercialization and regulatory approval. Other factors which
will affect the Company's ultimate commercial success include the competitive
environment, the impact of technological change, dependence on key personnel and
reliance on third party relationships.
The Company intends to lease its products to the customers on a
revenue-sharing rather than a fixed cost basis. Accordingly, revenue flows to
the Company will be affected by seasonal fluctuations in the geographic area of
placement of the product. The ability of the Company to generate revenues and
positive cash flow will depend on several factors including the nature and speed
of the development process, advancement of site testing and the timing and costs
in obtaining regulatory approvals for the Company's products.
25
<PAGE>
Item 3. Description of Property.
The Company's principal executive offices are located in Las Vegas,
Nevada. In addition, the Company has a Canadian subsidiary office located in
Vancouver, British Columbia.
The Company leases 1,036 square feet of space for its executive offices
at 2700 East Sunset Road, Suite 39, Las Vegas, Nevada. The lease is for a term
expiring February 28, 1999, at a rent of $1,875 per month, with an option to
renew on the same for a six month term expiring August 31, 1999.
The Company also leases 3,433 square feet of office space at 543
Granville Street, Vancouver, British Columbia, Canada. The space is under two
separate leases which expire February 28, 2002 as to 2,333 square feet and April
30, 2002 as to 1,100 square feet. The total rent payable under both the leases
is $27,000 per annum at current exchange rates..
Item 4. Security Ownership of Certain Benefical Owners and Management.
The following table sets forth as of October 1, 1998 the beneficial
ownership of Common Stock of the Company, the Company's only class of voting
securities, by (i) each person who is known to be the beneficial owner of more
than 5% of the Company's Common Stock, (ii) each director and each of the three
highest paid executive officers of the Company and (iii) all officers and
directors as a group.
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Name and Address of Beneficial Owner Beneficial Ownership(1) Class(1)
------------------------------------ ----------------------- --------
<S> <C> <C>
WWT & T Ltd. 995,000 8.01%
Firoz Lakhani (2) 900,000 6.86%
D. Bruce Horton (3) 1,160,000 8.96%
David B. Jackson (4) 988,650 7.68%
Roland M. Thomas (5) 200,000 1.59%
Bryan M. Dear (6) 910,000 7.07%
All Officers and Directors
As a Group (3 persons) 2,348,650 17.28%
</TABLE>
(1) Includes all shares currently outstanding and, as to each person
named, those which are not outstanding but which such person has the right to
acquire within 60 days.
(2) Includes 200,000 shares owned directly, 400,000 shares subject to a
common stock purchase warrant expiring April 1, 2003, exercisable at a price of
$.35 per share
26
<PAGE>
and 300,000 shares subject to a common stock purchase option expiring May 22,
2003, exercisable at a price of $.90 per share.
(3) Includes 635,000 shares owned directly, 225,00 shares subject to a
common stock purchase option expiring October 14, 2002, exercisable at a price
of $.30 per share and 300,000 shares subject to a common stock purchase option
expiring May 22, 2003, exercisable at a price of $.90 per share.
(4) Includes 528,650 shares owned directly, 160,00 shares subject to a
common stock purchase option expiring October 14, 2002, exercisable at a price
of $.30 per share and 300,000 shares subject to a common stock purchase option
expiring May 22, 2003, exercisable at a price of $.90 per share.
(5) Includes 200,000 shares subject to a common stock purchase option
expiring May 22, 2003, exercisable at a price of $.90 per share.
(6) Includes 450,000 shares owned directly, 160,000 shares subject to a
common stock purchase warrant expiring December 31, 2001, exercisable at a price
of $.30 per share and 300,000 shares subject to a common stock purchase option
expiring May 22, 2003, exercisable at a price of $.90 per share.
Item 5. Directors, Executive Officers, Promoters and Control Persons
The current executive officers, directors and significant employees of
the Company are as follows:
Name Age Position Or Area of Expertise
- - ---- --- -----------------------------
Bryan M. Dear 44 Founding Member of Fortune
Entertainment, Bahamas,
Investor Relations.
D. Bruce Horton 53 CFO, Secretary & Director
David B. Jackson 53 President, CEO & Director
Roland M. Thomas 48 Chief Operating Officer
Each director is elected to hold office until the next annual meeting
of stockholders and until his successor is elected and qualified. All officers
serve at the discretion of the Board of Directors.
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<PAGE>
The following sets forth with respect to each director and executive of
the Company such persons business experience during at least the past five
years:
David B. Jackson, Chief Executive Officer & Director.
Mr. Jackson has twenty-five years experience in management and
corporate finance of private and public companies in the gaming, mining and real
estate industries, and has served as officer, director and principal. Prior to
joining Fortune Bahamas in April 1996, Mr. Jackson was principally employed as
Vice President, Consolidated Ramrod Gold Corp. from April 1991 to October 1995
with responsibility for investor relations and financing, and as Vice President
of Atlanta Gold Corp. from April 1991 through May 1996 with responsibility for
corporate financing and investor relations. He has served as a director of the
Company since September 22, 1997.
D. Bruce Horton, Chief Financial Officer & Director.
Mr. Horton is a Certified General Accountant with over twenty-five
years experience in corporate financial reporting, financing, and tax planning
in both the private and public sectors. His specialties include corporate
management, reorganizations, mergers and acquisitions, international tax
structuring, and private and public financing. In early 1986, he co-founded the
Clearly Canadian Beverage Corporation and was Chief Financial Officer until
March of 1997 when he became Chief Financial Officer and a director of Fortune
Bahamas. He has served as Chief Financial Officer, Secretary and as a director
of the Company since September 22, 1998.
Roland M. Thomas, Chief Operating Officer.
Mr. Thomas has been involved in the management of product development,
software, systems, technology project management and international corporate
development for over 20 years. He has extensive experience in the United States,
Far East and Europe, and has been responsible for the development of industrial
software systems that are recognized and used around the world. Mr. Thomas has
served in executive roles in such diverse market segments as the manufacturing
industry, education, cargo handling and gaming. As well, Mr. Thomas has
published several papers on product development and is often requested to speak
at international industry seminars, universities and conferences. Before joining
the Company as Chief Operating Officer in September 1997, Mr. Thomas served
commencing February 1996 as Chief Executive Officer of Casino Software
Corporation, a public company he presently serves as a director. Mr. Thomas is
also employed as President of ERT Technology Corp., a position he has held since
August 1993.
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<PAGE>
Item 6. Executive Compensation
The following table summarizes the aggregate annual remuneration
proposed to be paid by the Company to each of the Company's three highest paid
executive officers during the current fiscal year and all officers and directors
as a group.
NAME OF INDIVIDUAL CAPACITY IN WHICH AGGREGATE
OR IDENTITY OF GROUP REMUNERATION WAS REMUNERATION
RECEIVED
David B. Jackson President, Chief Executive $125,000
Officer & Director
D. Bruce Horton Chief Financial Officer $125,000
Secretary & Director
Roland M. Thomas Chief Operating Officer $60,000
Officers & Directors $310,000
As a Group (3 persons)
Mr. Jackson's services are provided to the Company pursuant to a
consulting agreement between Fortune Bahamas and 555266 B.C. Ltd., a company of
which Mr. Jackson is the principal stockholder. The agreement provides for
payment of an annual fee for Mr. Jackson's services of $125,000 payable in
monthly installments. The agreement automatically renews for an additional one
year period on January 1 in each year unless either party gives written notice
of termination prior thereto.
Mr. Horton's services are provided to the Company pursuant to a
consulting agreement between Fortune Bahamas and Continental Consulting Inc., a
company of which Mr. Horton is the principal stockholder. The agreement provides
for payment of an annual fee for Mr. Horton's services of $125,000 payable in
monthly installments. The agreement automatically renews for an additional one
year period on January 1 in each year unless either party gives written notice
of termination prior thereto.
29
<PAGE>
Stock Options
Pursuant to separate stock option agreements, the Company has granted
options to purchase shares of Common Stock of the Company to certain officers,
directors, employees and consultants of the Company during the last fiscal year.
See Item 7 with respect to options and warrants granted to certain consultants
to the Company who do not serve as executive officers of the Company. The
following table sets forth information with respect to stock options granted to
the officers and directors of the Company and all executive officers as a group
during the last fiscal year ended December 31, 1997:
<TABLE>
<CAPTION>
SHARES
ISSUABLE EXERCISE
UPON PRICE PER EXPIRATION
NAME EXERCISE SHARE DATES
<S> <C> <C> <C>
D. Bruce Horton 500,000 $.30 October 14, 2002
David B. Jackson 500,000 .30 October 14, 2003
Roland M. Thomas - - -
Officer & Directors as 1,000,000 .30 October 14, 2003
a Group (3 persons)
</TABLE>
No options were exercised by any of the foregoing persons during the
past fiscal year. Subsequent to the end of the fiscal year, Mr. Horton exercised
options to purchase 275,000 shares at $.30 per share and Mr. Jackson exercised
options to purchase 340,000 shares at $.30 per share.
1998 Incentive Stock Option Plan. The Company's 1998 Incentive Stock
Option Plan (the "Plan") was adopted by the Board of Directors of the Company in
1998. A total of 2,000,000 shares of Common Stock have been reserved for
issuance under the Plan. The Plan provides for grants to employees of the
Company of stock options which are intended to qualify as "Incentive Stock
Options" within the meaning of Section 422 of the Internal Revenue Code, as
amended ("ISOs"). The Plan is administered by the Board of Directors or by a
committee appointed by the Board. The administrator determines the terms of
options and stock purchase rights granted, including the exercise price and the
number of shares subject to the option or stock purchase right. The exercise
price of incentive stock options granted under the Plan must be at least equal
to the fair market value of the Company's Common Stock on the date of grant. The
maximum term of options granted under the Plan is 10 years. As of the date of
this registration statement, there were no outstanding options under the Plan.
1998 Non-Qualified Incentive Stock Option Plan. The Company's 1998
Non-Qualified Incentive Stock Option Plan (the "NSOP Plan") was adopted by the
Board of Directors of the Company on May 22, 1998. A total of 5,000,000 shares
of Common Stock have been reserved for issuance under the NSOP Plan. The NSOP
Plan provides for grants to employees, directors, consultants, advisors and
others rendering services to the Company of stock options which are not intended
to qualify as "Incentive Stock Options" within the meaning of Section 422 of the
Internal Revenue Code, as amended. The Plan is administered by the
30
<PAGE>
Board of Directors or by a committee appointed by the Board. The administrator
determines the terms of options and stock purchase rights granted, including the
exercise price and the number of shares subject to the option or stock purchase
right. As of the date of this registration statement, there were outstanding
options to purchase 1,425,000 shares of common stock under the NSOP Plan.
1998 Stock Bonus Plan. The Company's 1998 Stock Bonus Plan (the "Bonus
Plan") was adopted by the Board of Directors of the Company in 1998. A total of
500,000 shares of Common Stock have been reserved for issuance under the Plan.
The Bonus Plan provides for the grant of shares of Common Stock to employees,
directors, consultants and advisors of the Company. The Bonus Plan will be
administered by a committee of two directors appointed by the Board. The
Committee determines the persons who are to receive Bonus Shares, the number of
shares granted and the terms of vesting of such shares. As of the date of this
registration statement, no Bonus Shares had been awarded under the Bonus Plan.
Item 7. Certain Relationships and Related Transactions
Certain officers and directors have each made loans or advances to the
Company which in the case of each such officer or director have not exceeded
$60,000 at any time. See Note 7 of Notes to Consolidated Financial Statements.
Mr. Brian Dear, a founder of the Company's Fortune Bahamas subsidiary,
provides investor relations consulting services to the Company pursuant to a
consulting agreement between Fortune Bahamas and BMD Financial Inc., a company
of which Mr. Dear is the principal stockholder. The agreement provides for
payment of an annual fee for consulting services of $125,000 payable in monthly
installments. The agreement automatically renews for an additional one year
period on January 1 in each year unless either party gives written notice of
termination prior thereto. Pursuant to the agreement, on November 14, 1997, Mr.
Dear was granted an option expiring December 31, 2001 to purchase 500,000 shares
of the Company's Common Stock at a purchase price of $.30 per share. On April 1,
1998, Mr. Dear exercised the option with respect to 340,000 shares and made
payment by crediting the $102,000 exercise price against the amount then past
due under the consulting agreement with BMD Financial. On May 22, 1998, as
additional consideration for services rendered, Mr. Dear was granted a
Non-Qualified Stock Option expiring May 22, 2003, to purchase 300,000 shares of
Common Stock at a price of $.90 per share.
Mr. Firoz Lakhani provides business and consulting services to the
Company pursuant to a consulting agreement dated as of April 1, 1998, between
the Company and Moorgate Management Inc.("Moorgate"), a company of which Mr.
Lakhani is the principal stockholder. The agreement provides for payment of an
annual fee for consulting services of $125,000 payable in monthly installments.
The agreement automatically renews for an additional one year period on April 1
in each year unless either party gives written notice of termination prior
thereto. Upon execution of the agreement in accordance with the terms of the
agreement Moorgate was granted 200,000 shares of the Company's Common Stock and
a warrant expiring April 1, 2003 to purchase 400,000 shares of Common Stock at a
price of $.035 per share. On May 22, 1998, as additional consideration for
services rendered, Mr. Lakhani was granted a Non-Qualified Stock Option expiring
May 22, 2003, to purchase 300,000 shares of Common Stock at a price of $.90 per
share.
31
<PAGE>
Item 8. Description of Securities
The Company's authorized capital stock consists of 30,000,000 shares of
Common Stock, par value $0.0001 per share, and 1,100,000 Series A Preferred
Stock, par value $0.0001; 1,100,000 Series B Preferred Stock, par value $0.0001;
and 1,100,000 Series C Preferred Stock, par value $0.0001. As of July 31, 1998,
there were 10,593,020 shares of Common Stock outstanding and 323 holders of
record. In addition, there were 272,364 Preferred Shares of Series A, 1,090,464
Series B shares and 1,090,464 Series C shares issued and outstanding
respectively.
Each share of the Series A Preferred Stock is, at the option of the
holder of the shares, convertible into one share of the Common Stock. As of July
31, 1998, there were 272,364 Series A shares outstanding.
Each share of the Series B Preferred Stock is, at the option of the
holder of the shares, convertible into one share of the Common Stock. As of July
31, 1998, there were 1,090,464 Series B shares outstanding.
Each of the Series C Preferred Stock is, at the option of the holder of
the shares, convertible into one share of the Company's common stock commencing
November 20, 1998. As of July 31, 1998, there were 1,090,464 Series C shares
issued and outstanding.
Each of the shares of Common Stock has equal dividend, liquidation and
voting rights. Holders of shares of Common Stock are entitled to one vote per
share on all matters to be voted upon by shareholders. Holders of the shares of
Common Stock are entitled to receive dividends when, and if, declared by the
Board of Directors from funds legally available therefore. The shares of Common
Stock are not redeemable, have no conversion rights and carry no preemptive or
other rights to subscribe for additional shares.
The rights of holders of shares of Common Stock as described above,
will be subject to, and may be adversely affected by, the rights of holders of
any Preferred Stocks that are currently issued or that may be issued in the
future. The Board of Directors currently does not contemplate the issuance of
any further Preferred Stock.
The holders of issued and outstanding Series A Preferred Stock, Series
B Preferred Stock and Series C Preferred Stock ("Preferred Stock") in preference
to the holders of common stock, shall be entitled to receive, when, as and if
declared by the Board of directors out of funds legally available for the
purpose, annual dividend payable in cash on the 1st day of January, in each
year, commencing on January 15, 1998 at the rate of $0.01 per share per year.
Dividends which are not declared, will not accrue. Dividends not
declared will not cumulate. Accrued, but unpaid dividends shall not bear
interest. Dividends paid in an amount less than the total amount of such
dividends at the time such dividends are declared and become payable shall be
allocated pro rata on a share-by-share basis among all such shares outstanding
at that time. The Board of Directors may fix a record date for the determination
of holders of the Preferred Stock entitled to receive payment of a dividend or
distribution declared thereon, which record date shall be not more than thirty
(30) days prior to the date fixed for the payment thereof.
32
<PAGE>
Holders of the Preferred Stock shall have no special voting rights and
their consent shall not be required (except to the extent they are entitled to
vote with holders of common Shares and any other capital stock of the Company
having general voting rights as set forth herein) for taking any corporate
action.
Whenever dividends declared or other distribution payable on the
Preferred Stock as provided above are in arrears, thereafter and until all
unpaid dividends and distributions on Preferred Stock outstanding shall have
been paid in full, the Company shall not:
(a) declare or pay dividends, or make any other distribution, on
any shares of stock ranking junior (either as to dividends or
upon liquidation, dissolution or winding up) to the Preferred
Stock;
(b) declare or pay dividends, or make any other distribution, on
any shares of stock ranking on a parity (either as to dividend
or upon liquidation, dissolution or winding up) with the
Preferred Stock, except dividends paid notably on the
Preferred Stock and all such parity stock on which dividends
are payable or in arrears in proportion to the total amounts
to which the holders of all such shares are then entitled;
(c) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking junior (either as to dividends or
upon liquidation, dissolution or winding up) to the Preference
Stock, provided that the Company may at any time redeem,
purchase or otherwise acquire shares of any such junior stock
in exchange for shares of stock of the Company ranking junior
(both as to dividends and upon liquidation, dissolution or
winding up) to the Preferred Stock; or,
(d) redeem, purchase or otherwise acquire for consideration
Preferred Stock, or any shares of stock ranking on a parity
with the Preferred Stock, except in accordance with a purchase
offer made in writing or by publication (as determined by the
Board of Directors) to all holders of such shares upon such
terms as the Board of Directors, after consideration of the
respective annual dividend rates and other relative rights and
preferences of the respective series and classes, shall
determine in good faith will result in fair and equitable
treatment among the respective series of classes.
33
<PAGE>
PART II
Item 1. Market Price of And Dividends on The Registrant's Common Equity And
Other Shareholder Matters.
Market Information
The Common Stock is traded on the Over the Counter Bulletin Board under
the symbol "FETG". The following table presents the high and low closing bid
quotations for the Common Stock as reported by the National Quotation Bureau for
each quarter beginning May 8, 1998 when the stock first commenced trading. Such
prices reflect inter-dealer quotations without adjustments for retail mark-up,
markdown or commissions, and do not necessarily represent actual transactions.
Closing Bid
Period Low High
May 8, 1998 - June 30, 1998 $ .53125 $ 2.00000
July 1, 1998-September 30, 1998 .87500 1.96875
October 1, 1998-October 29, 1998 .40625 .78125
As of June 18, 1998, the Company's Common Stock has been authorized to
trade in Germany on the Berlin Stock Exchange under the symbol "FET".
The Registrant has approximately 322 record holders of its Common
Stock.
Dividends
The Company has never declared or paid any cash dividends. It is the
present policy of the Company to retain earnings to finance the growth and
development of the business and, therefore, the Company does not anticipate
paying dividends on its common stock in the foreseeable future.
Item 2. Litigation
The Company's subsidiary, Fortune Entertainment Corporation of British
Columbia, Canada, commenced an action in the Vancouver Registry of the Supreme
Court of British Columbia on May 6, 1998 against Advanced Gaming Technology,
Inc. to recover $990,000 as a debt owed by defendant to plaintiff pursuant the
defendant's written agreement made March 30, 1998 to pay plaintiff $990,000 to
repurchase from plaintiff the plaintiff's right to participate in defendant's
interest in a United Kingdom bingo project. The Plaintiff intends to make an
application to the Supreme Court of British Columbia for a summary trial of the
action. See Note 5 of Notes to Consolidated Financial Statements.
In addition, the Company is engaged in routine litigation incident to
its business which would not, in the opinion of the Company, individually or in
the aggregate, have a material adverse effect on the Company.
34
<PAGE>
Item 3. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None
Item 4. Recent Sales of Unregistered Securities.
The following sets forth certain information regarding sales of, and
other transactions with respect to, securities of the Company issued during the
past three years (or since inception), which sales and other transactions were
not registered pursuant to the Securities Act of 1933, as amended (the
"Securities Act"). Unless otherwise indicated, no underwriters were used in such
transactions.
(i) On August 26, 1997, the Company issued 100 common shares for
net proceeds of $10 to Bona Vista West Ltd. These shares were
privately offered and issued in reliance on the exemption from
registration afforded by Section 4(2) under the Securities Act
of 1933, as amended (the "Securities Act").
(ii) On September 16, 1997, as consideration for the merger of FET,
Inc., a Colorado Corporation, with and into the Company, the
Company issued 2,175,456 common shares to the former
shareholders of FET, Inc. in an offering exempted from
registration under Rule 504 of Regulation D of the Securities
Act.
(iii) On September 17, 1997, the Company issued 999,900 common
shares for net proceeds of $100 to Bona Vista West Ltd. These
shares were privately offered and issued in reliance on the
exemption from registration afforded by Section 4(2) under the
Securities Act of 1933, as amended (the "Securities Act")
(iv) Pursuant to Subscription Agreements dated September 22, 1997
and October 10, 1997, the Company issued 75,000 shares for a
net proceeds of $72,000 (60,000 shares @ $0.95 and 15,000
shares @ $1.00). These shares were issued pursuant to the
exemption afforded by Regulation S under the Securities Act.
(v) On October 14, 1997, the Company issued 1,090,464 common
shares, 1,909,464 shares of Series A Preferred Stock,
1,090,464 shares of Series B Preferred Stock, 1,090,464,
shares of Series C Preferred Stock in exchange for all the
issued and outstanding shares of Fortune Bahamas. Each share
of the Company's Preferred Stock is, at the option of the
holder, convertible into one share of the Company's Common
Stock on and after the following dates: Series A Preferred
Stock-May 20, 1998, Series B Preferred Stock-August 20, 1998,
Series C Preferred Stock-November 20, 1998. As of July 31,
1998 818,100 shares of the Company's Series A Preferred Stock
had been converted into 818,100 common shares. (See
"Description of the Business--Business of the Issuer-Material
Acquisitions") These share were issued as a private offering
under Regulation D of the Securities Act.
(vi) In October 1998, the Company entered into a Subscription
Agreement with a non-US person in an offshore transaction
pursuant to which it issued 125,000
35
<PAGE>
shares of Common Stock for net proceeds of $250,000. The
Company relied upon the exemption from registration afforded
by Regulation S.
(vii) On November 1, 1997, the Company issued 15,000 common shares
to Keith Lim for a consideration of $15,000 in a private
offering. The company relied upon the exemption afforded by
Section 4(2) of the Securities Act.
(viii) Pursuant to an Agreement dated November 19, 1997, as amended,
with Team Rainbow, Inc., the Company issued 250,000 common
shares to Team Rainbow, Inc. in payment of a portion of the
consideration for the Rainbow 21 blackjack game acquired from
Team Rainbow, Inc. These shares were issued in reliance on the
exemption from registration afforded by Section 4(2) of the
Securities Act. (See "Description of the Business--Business of
the Issuer-Material Acquisitions").
(ix) On March 11,1998, the Company issued and sold 125,000 common
shares to International High Adventures for $250,000 in a
private offering under Rule 504 of Regulation D of the
Securities Act.
(x) On March 12, 1998, the Company issued and sold 345,000 common
shares to Partner Marketing AG for $258,750 and 345,00 shares
to Turf Holdings Ltd. for $258,750 in a private offering
relying upon the exemption afforded by Section 4(2) of the
Securities Act.
(xi) On March 12, 1998, the Company issued and sold 35,000 common
shares to Theodore Silvester Jr. for $70,000 and 470,000
common shares to Anastasia Danton for $940,000 in a private
offering in connection with the acquisition of Professional
Video Associates, Inc. (See "Description of the
Business--Business of the Issuer-Material Acquisitions" ) The
company relied upon the exemption afforded by Section 4(2) of
the Securities Act.
(xii) In March, 1998, the Company issued 150,000 common shares to
Bruno Benedet as a finder's fee for the introduction of SGTI
to the Company. These shares were privately offered and issued
in reliance on the exemption from registration afforded by
Section 4(2) under the Securities Act. (See "Description of
the Business-Business of the Issuer-Material Acquisitions").
(xiii) In April 1998, pursuant to Subscription Agreements, the
Company issued 17,000 (9,000 to Stephen Katz Ltd. and 8,000 to
Michael Taylor) common shares of the Company to for an
aggregate amount of $20,400. In the same month, the Company
issued 690,000 units (each unit comprising of one common share
and one share purchase warrant entitling the holder to
purchase an additional common share of the Company @ $0.75)
for a net proceeds of $517,500. For these transactions, the
Company relied upon the exemption afforded by Regulation S.
(xiv) Between May through August, 1998, the Company issued 818,000
common shares to shareholders of Fortune Bahamas who converted
818,000 shares of Series A Preferred Stock. The shares were
issued under Rule 504 of Regulation D of the Securities Act.
36
<PAGE>
(xv) On April 1, 1998, the Company issued 200,000 common shares to
Moorgate Mgmt. Inc. in consideration of services rendered to
the Company under the exemption afforded by Section 4(2) of
the Securities Act.
(xvi) On April 1, the Company issued 340,000 common shares to David
B. Jackson and 340,00 common shares to BMD Financial Inc. in
each case for a consideration of $102,000, and 275,000 common
shares to D. Bruce Horton for a consideration of $82,500 upon
the exercise of certain options (in each case, at $0.30 per
option). The company relied upon the exemption afforded by
Section 4(2) of the Securities Act.
(xvii) On April 3, the Company issued 200,000 common shares to Gerald
Wittenberg in consideration of services rendered to the
Company in connection with the Company's acquisition of
Professional Video Associates, Inc. (See "Description of the
Business--Business of the Issuer-Material Acquisitions"). The
company relied upon the exemption afforded by Section 4(2) of
the Securities Act.
(xviii) In May 1998, the Company issued 10,000 common shares to
Rosalyn Zisman for a consideration of $12,000, 12,000 common
shares to Ken Lee for a consideration of $12,000 and 100,000
common shares to L-Hermitage Investment Ltd. for a
consideration of $75,000. In each case, the Company relied
upon the exemption afforded by Section 4(2) of the Securities
Act.
(xix) In May 1998, pursuant to Subscription Agreements, the Company
for a consideration of $26,400 issued 22,000 common shares. In
addition, pursuant to an Offshore Subscription Agreement, the
Company issued 100,000 units (each unit comprising of one
common share and one share purchase warrant entitling the
holder to purchase one additional share for $0.75 in year one
and $0.90 in year two for net proceeds of $75,000. These
securities were issued pursuant to Regulation S.
(xx) On May 22, 1998, the Company issued 995,500 common shares to
WWT & T Ltd., 37,500 common shares to Stephen Holniker, 10,000
common shares to Richard Falck, 70,000 common shares to Neil
Glassman and 30,000 common shares to Steven Angstreich in
payment of a portion of the purchase price for the acquisition
of Professional Video Associates, Inc. (See "Description of
the Business--Business of the Issuer-Material Acquisitions.")
The company relied upon the exemption afforded by Section 4(2)
of the Securities Act.
(xxi) On May 27, 1998, the Company issued 37,500 common shares to
Stratford Technologies, Ltd. in consideration of services
rendered to the Company. The company relied upon the exemption
afforded by Section 4(2) of the Securities Act.
(xxii) On June 18, 1998, the Company issued 200,000 common shares for
in connection with the acquisition of certain assets of Team
Rainbow, Inc. (See "Description of the Business--Business of
the Issuer-Material Acquisitions.")
37
<PAGE>
The company relied upon the exemption afforded by Section 4(2)
of the Securities Act.
(xxiii) In June and July, pursuant to Offshore Subscription Agreement,
the Company issued 1,000,000 Units in four separate
transactions (each Unit comprising of one common share and one
share purchase warrant entitling the holder to purchase one
additional common share of the Company at $0.75 in year one
and $0.85 in year two. These Company realized net proceeds of
$750,000 and the Units were issued pursuant to the exemption
afforded by Regulation S under the Securities Act.
(xxiv) In addition to the above-noted transactions, the Company,
pursuant to an Agreement dated June 7, 1998 as amended, with
PVA, issued a total of 1,647,500 shares and paid a finder's
fee of 200,000 shares. The Company relied upon the exemption
afforded by Section 4(2) of the Securities Act (See
"Description of the Business--Business of the Issuer-Material
Acquisitions").
(xxv) On June 20, 1998, the Company issued 25,000 common shares to
Mitchell A. Garber and 25,000 common shares to Lazarus
Charbonneau in respect of services rendered to the Company.
The company relied upon the exemption afforded by Section 4(2)
of the Securities Act.
(xxvi) On July 6, 1998, the Company issued 200,000 common shares to
Clarion Finanz, AG for a purchase price of $150,000, 200,000
common shares to Professional Trading Services Ltd. for a
consideration of $150,000, 300,000 common shares to Clyde
Resources Ltd. for a consideration of $225,000 and 300,000
common shares to Caulfield Management Ltd. for a consideration
of $225,000. The Company relied upon the exemption provided
under Regulation S.
(xxvii) On July 22, 1998, the Company issued 50,000 shares to Team
Rainbow Inc. in connection with the acquisition of certain
assets of Team Rainbow, Inc. (See "Description of the
Business--Business of the Issuer-Material Acquisitions.") The
company relied upon the exemption afforded by Section 4(2) of
the Securities Act.
(xxviii) On July 27, 1998, the Company issued 50,000 shares to Fortune
Capital Management Inc. at a consideration of $37,500 in a
private offering. The company relied upon the exemption
afforded by Section 4(2) of the Securities Act.
(xxix) On July 28, 1998, the Company issued 150,000 common shares to
Lines Overseas Management Ltd. for a consideration of $112,500
in a private offering. The Company relied upon the exemption
afforded by Section 4(2) of the Securities Act.
38
<PAGE>
Item 5. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law permits a
corporation to grant indemnification to directors, officers, employees and other
agents in terms sufficiently broad to permit indemnification under certain
circumstances for liabilities, including expenses, arising in connection with
the Securities Exchange Act of 1934, as amended, and the Securities Act of 1934,
as amended. Pursuant to the Certificate of Incorporation and Bylaws of the
Registrant, the Registrant is empowered to indemnify its directors and officers
of the Registrant to the fullest extent permitted by law.
Article XIII of the Registrant's Certificate of Incorporation
eliminates the personal liability of the Registrant's directors to the
Registrant or its stockholders for monetary damages for breach of their
fiduciary duties as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Registrant or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) acts by such director as specified by the
Delaware Corporation Law or (iv) for any transaction from which the director
derived any improper personal benefit.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 or the Securities Exchange Act of 1934 may be permitted to
directors, officers or persons controlling the Registrant pursuant to the
foregoing provisions, the Registrant has been informed that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933 and the Securities Exchange
Act of 1934 and is therefore unenforceable.
39
<PAGE>
PART F/S
Financial Statements
List of Financial Statements
CONSOLIDATED FINANCIAL STATEMENTS OF FORTUNE ENTERTAINMENT CORPORATION
Audited Financial Statements for the Period from August 19, 1997 to December
31, 1997
Independent Auditor's Report
Balance Sheet as of December 31, 1997
Consolidated Statement of Operations
Statement of Shareholders' Equity
Statement of Cash Flows
Notes to Audited Financial Statements
Financial Statements for the Six Month Period Ended June 30, 1998
(unaudited)
Balance Sheet as of June 30, 1998
Consolidated Statement of Operations
Consolidated Statement of Cash Flows
Notes to Unaudited Financial Statements
FINANCIAL STATEMENTS OF FORTUNE ENTERTAINMENT CORPORATION (BAHAMAS)
Audited Financial Statements of Fortune Entertainment Corporation for
the year ended December 31, 1997 and the period from
incorporation on April 2, 1996 to December 31, 1996
Pro Forma Unaudited Consolidated Statements of Operations
of Fortune Entertainment Corporation and Fortune
Entertainment Corporation (Bahamas) for the year
ended December 31, 1997
40
<PAGE>
PART III
Item 1. Index to Exhibits.
The Exhibit Index specifying the sequential page number of
each Exhibit filed herewith appears immediately after the
financial statements.
Item 2. Description of Exhibits.
2.1 Articles of Incorporation of Registrant
2.2 By-Laws of the Registrant
3.1 Certificate of Designation, Preferences and Rights of the
Series A Preferred Stock
3.2 Certificate of Designation, Preferences and Rights of the
Series B Preferred Stock
3.3 Certificate of Designation, Preferences and Rights of the
Series C Preferred Stock
5.1 Purchase & Sale Agreement between the Company and Video
Lottery Consultants, Inc. for Professional Video Associates,
Inc. dated September 5, 1997, as amended.
5.2 Letter Agreement between Team Rainbow Inc. and the Company
dated November 19, 1997, as amended.
5.3 Assignment of Software Release Agreement between William M.
Danton & Fortune Entertainment Corporation (Bahamas).
5.4 Assignment of Manufacturing Agreement dated July 14, 1998
between Video Lottery Consultants, Inc. & Fortune
Entertainment Corporation (Bahamas).
41
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
By: /s/ David Jackson
-----------------------------
Date: October 30, 1998 Chief Executive Officer
42
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S>
CONSOLIDATED FINANCIAL STATEMENTS OF FORTUNE ENTERTAINMENT CORPORATION
<C>
Audited Financial Statements for the Period from August 19, 1997 to December 31, 1997
Independent Auditor's Report...............................................................................................F-2
Balance Sheet as of December 31, 1997......................................................................................F-2
Consolidated Statement of Operations.......................................................................................F-4
Statement of Shareholders' Equity..........................................................................................F-5
Statement of Cash Flows....................................................................................................F-6
Notes to Audited Financial Statements......................................................................................F-7
Financial Statements for the Six Month Period Ended June 30, 1998
(unaudited)
Balance Sheet as of June 30, 1998.........................................................................................F-22
Consolidated Statement of Operations......................................................................................F-24
Consolidated Statement of Cash Flows......................................................................................F-25
Notes to Unaudited Financial Statements...................................................................................F-26
FINANCIAL STATEMENTS OF FORTUNE ENTERTAINMENT CORPORATION (BAHAMAS)
Audited Financial Statements of Fortune Entertainment Corporation for
the year ended December 31, 1997 and the period from
incorporation on April 2, 1996 to December 31, 1996...........................................................F-31
Pro Forma Unaudited Consolidated Statements of Operations
of Fortune Entertainment Corporation and Fortune
Entertainment Corporation (Bahamas) for the year
ended December 31, 1997......................................................................................F-39
</TABLE>
F-1
<PAGE>
- - --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
================================================================================
To the Shareholders of
Fortune Entertainment Corporation
We have audited the accompanying consolidated balance sheet of Fortune
Entertainment Corporation as of December 31, 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the period from August 19, 1997 to December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Fortune
Entertainment Corporation at December 31, 1997 and the consolidated results of
its operations and its cash flows for the period from August 19, 1997 to
December 31, 1997, in conformity with accounting principles generally accepted
in the United States.
/s/ ERNST & YOUNG
March 6, 1998 (except for Notes 5 and
11 which are as of July 31, 1998).
Vancouver, Canada,
F-2
<PAGE>
- - --------------------------------------------------------------------------------
Fortune Entertainment Corporation
CONSOLIDATED BALANCE SHEET
================================================================================
As at December 31
1997
$
- - ------------------------------------------------------------------------------
ASSETS
Current
Cash 41,890
Accounts receivable 28,183
Prepaid expenses and other current assets 22,496
- - ------------------------------------------------------------------------------
Total current assets 92,569
- - ------------------------------------------------------------------------------
Deposit [Note 11[c]] 10,000
Investments [Note 5] 1
Property and equipment, net [Note 6] 67,807
Goodwill, net of accumulated amortization of $13,278 600,182
[Note 3[a]]
Intellectual Property - PVA Electronic Tournament Poker 5,106,986
[Note 4]
- - ------------------------------------------------------------------------------
Total assets 5,877,545
- - ------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities 75,790
Due to related parties [Note 7[a]] 360,256
Loans payable [Note 8] 334,671
Purchase consideration payable [Note 3[b]] 1,906,986
- - ------------------------------------------------------------------------------
Total current liabilities 2,677,703
- - ------------------------------------------------------------------------------
Purchase consideration payable [Note 3[b]] 1,433,014
- - ------------------------------------------------------------------------------
Total liabilities 4,110,717
- - ------------------------------------------------------------------------------
Commitments and contingencies [Notes 3, 4 and 11]
Stockholders' equity
Share stock [Note 9]
Common stock, $0.0001 par value 427
30,000,000 authorized, 4,265,920 issued and outstanding
Preferred Stock, $0.0001 par value, convertible 327
For each of Class A, B and C Preferred Stock:
1,100,000 authorized, 1,090,464 issued and outstanding
Additional paid in capital 1,547,188
Share stock to be issued [Notes 9[c] and 9[d]] 1,675,000
Accumulated deficit (1,456,114)
- - ------------------------------------------------------------------------------
Total stockholders' equity 1,766,828
- - ------------------------------------------------------------------------------
Total liabilities and stockholders' equity 5,877,545
================================================================================
See accompanying [Notes
On behalf of the Board:
/s/ David Jackson
-----------------
Director Director
F-3
<PAGE>
- - --------------------------------------------------------------------------------
Fortune Entertainment Corporation
CONSOLIDATED STATEMENT OF OPERATIONS
================================================================================
Period from August 19, 1997 to December 31, 1997
1997
$
- - --------------------------------------------------------------------------------
EXPENSES
Advertising 1,941
Amortization of intangible assets 13,278
Bank charges and interest 8,047
Depreciation 4,310
Foreign exchange loss 4,681
Management fees [Note 7[b]] 126,050
Office and miscellaneous 39,696
Professional fees 102,874
Rent 8,515
Salaries and wages 34,711
Travel, promotion and entertainment 77,998
- - --------------------------------------------------------------------------------
Total expenses 422,101
- - --------------------------------------------------------------------------------
Loss before the following: (422,101)
Investment valuation reserve [Note 5] (1,034,013)
- - --------------------------------------------------------------------------------
Loss for period and deficit end of period (1,456,114)
- - --------------------------------------------------------------------------------
Basic and diluted loss per share [Note 9[f]] (1.26)
================================================================================
See accompanying [Notes
F-4
<PAGE>
- - --------------------------------------------------------------------------------
Fortune Entertainment Corporation
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
================================================================================
December 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
------------ --------------- ADDITIONAL
NUMBER NUMBER PAID-IN ACCUMULATED
OF SHARES AMOUNT OF SHARES AMOUNT CAPITAL DEFICIT TOTAL
# $ # $ $ $ $
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1996 -- -- -- -- -- -- --
Issuance of common stock
[Note 9[b]] 4,265,920 427 -- -- 390,523 -- 390,950
Common stock to be issued
[Notes 9[c] and 9[d]] -- 1,675,000 -- -- -- -- 1,675,000
Issuance of preferred stock
[Note 9[b]] -- -- 3,271,392 327 1,156,665 -- 1,156,992
Net loss for the period -- -- -- -- -- (1,456,114) (1,456,114)
- - ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 4,265,920 1,675,427 3,271,392 327 1,547,188 (1,456,114) 1,766,828
====================================================================================================================================
</TABLE>
See accompanying [Notes
F-5
<PAGE>
- - --------------------------------------------------------------------------------
Fortune Entertainment Corporation
CONSOLIDATED STATEMENT OF CASH FLOWS
================================================================================
Period from August 19, 1997 to December 31, 1997
1997
$
- - -----------------------------------------------------------------------------
OPERATING ACTIVITIES
Net loss for period (1,456,114)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of intangible assets 13,278
Depreciation 4,310
Investment valuation reserve 1,034,013
Changes in operating assets and liabilities:
Accounts receivable (10,915)
Prepaid expenses and other current assets (12,373)
Accounts payable and accrued liabilities 52,310
- - -----------------------------------------------------------------------------
Net cash used in operating activities (375,491)
- - -----------------------------------------------------------------------------
INVESTING ACTIVITIES
Acquisition of property and equipment (6,017)
Acquisition of investments (44,014)
Businesses acquisitions, net of cash acquired (18,850)
- - -----------------------------------------------------------------------------
Net cash used in investing activities (68,881)
- - -----------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from capital contributions 5,285
Shares subscriptions received 265,000
Borrowings under loans payable 84,671
Advances from related parties 131,306
- - -----------------------------------------------------------------------------
Net cash provided by financing activities 486,262
- - -----------------------------------------------------------------------------
Net increase in cash during the period and cash,
end of period 41,890
=============================================================================
See accompanying [Notes
F-6
<PAGE>
- - --------------------------------------------------------------------------------
Fortune Entertainment Corporation
NOTES TO FINANCIAL STATEMENTS
================================================================================
December 31, 1997
1. FORMATION AND BUSINESS OF THE COMPANY
Fortune Entertainment Corporation (the "Company"), was incorporated on August
25, 1997 in Delaware. On September 16, 1997, the Company acquired all of the
issued and outstanding share stock from shareholders of FET, Inc. (a Colorado
Corporation incorporated on August 19, 1997) for consideration of 2,175,456
common shares of the Company. As a result of this acquisition, the previous
shareholders of FET, Inc., as a group, owned more than 50% of the issued and
outstanding voting shares of the Company. Consequently, this business
combination has been accounted for as a reverse acquisition whereby FET, Inc.
is deemed to have acquired the Company. Accordingly, the consolidated balance
sheet of the Company as at December 31, 1997 is based upon the accounts of
FET, Inc. at their historic net book value and the accounts of the Company at
their estimated fair value at the time of the transaction. The estimated fair
value of the Company at the time of the transaction was based upon an ascribed
value of $0.10 per share for the 100 common shares of the Company that were
outstanding prior to the transaction with FET, Inc.
The deemed acquisition of the Company by FET, Inc., based upon the Company's
financial statements as at the date of its incorporation on August 25, 1997 was
as follows:
$
---
Net assets acquired
Cash 10
===
Deemed consideration
100 shares of the Company outstanding prior to
acquisition by FET, Inc. 10
===
The Company is the surviving corporation and is committed to developing gaming
and entertainment products for both the North American and International
markets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Fortune Entertainment Corporation (Bahamas),
Fortune Entertainment Corporation (British Columbia, Canada), and Professional
Video Association, Inc. (Delaware). All significant intercompany accounts and
transactions have been eliminated.
F-7
<PAGE>
- - --------------------------------------------------------------------------------
Fortune Entertainment Corporation
NOTES TO FINANCIAL STATEMENTS
================================================================================
December 31, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
[Notes. Actual results could differ from these estimates.
Financial instruments
Amounts reported for cash, accounts receivable, accounts payable and accrued
liabilities, due to related parties, loans payable and purchase consideration
payable are considered to approximate fair value primarily due to their short
maturities.
Property and equipment
Property and equipment are stated at cost and are being depreciated on a
straight-line basis over the estimated useful lives of the related assets (2 - 5
years). Leasehold improvements are amortized on a straight-line basis over the
shorter of the remaining lease term or the estimated lives.
Income taxes
The Company uses the liability method of accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on the
difference between financial statement and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that are expected to be
in effect when the differences are expected to reverse. Recognition of
deferred tax assets is limited to amounts considered by management to be more
likely than not of realization in future periods.
Concentrations of credit risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash in the bank. The
Company maintains cash with high quality financial institutions.
Advertising costs
Advertising costs are expensed as incurred.
Investments and accounting for impairment of long-lived assets
Investments are recorded at the lesser of historical cost or net recoverable
value. The Company continually evaluates whether events and circumstances have
occurred indicating the remaining estimated useful life of long-lived assets
may warrant revision, or long-lived asset balances may not be recoverable. If
factors indicate long-lived assets have been impaired, the Company uses an
estimate of the remaining value of the long-lived assets in measuring
recoverability. Unrecoverable amounts are charged to operations in the
applicable period.
Goodwill and intellectual property
Goodwill is being amortized on a straight-line basis over ten years commencing
October 14, 1997. PVA Electronic Tournament Poker will be amortized on a
straight-line basis over ten years commencing in fiscal 1998.
F-8
<PAGE>
- - --------------------------------------------------------------------------------
Fortune Entertainment Corporation
NOTES TO FINANCIAL STATEMENTS
================================================================================
December 31, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock-based compensation
The Company accounts for stock-based compensation based on the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation". This statement establishes financial accounting and
reporting standards for stock-based employee compensation plans and allows
companies to choose either: 1) a fair value method of valuing stock-based
compensation which will effect reported net income; or 2) to follow the
existing accounting rules for stock-based compensation but disclose what the
impact would have been had the fair value method been adopted. The Company
elected the disclosure option of this standard. See Note 9[e].
Computation of Net Loss per Common Share
Basic loss per share is computed by dividing the net loss attributable to
common stockholders by the weighted average number of common shares
outstanding for that period. Diluted loss per share is computed giving effect
to all dilutive potential common shares that were outstanding during the
period. Dilutive potential common shares consist of incremental common shares
issuable upon exercise of convertible securities. As at December 31, 1997,
there were no dilutive potential common shares and therefore the dilutive loss
per share is equivalent to the basic loss per share.
Recent Pronouncements
During June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income." This statement establishes
requirements for disclosure of comprehensive income and becomes effective for
the Company for fiscal years beginning after December 15, 1997, with
reclassification of earlier financial statements for comparative purposes.
Comprehensive income generally represents all changes in stockholders' equity
except those resulting from investments or contributions by stockholders. The
Company is evaluating alternative formats for presenting this information, but
does not expect this pronouncement to materially impact the Company's results
of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise on Related Information", which changes the way public companies
report information about operating segments. SFAS No. 131, which is based on
the management approach to segment reporting, establishes requirements to
report elected segment information quarterly and to report entity-wide
disclosures about products and services, major customers and major countries
in which the entity holds assets and reports revenues. The Company has not yet
evaluated the effects of this change on its reporting segment information.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Post Retirement Benefits". The Company does not have any
such plans for its employees.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities". The Company does not acquire derivatives or engage in
hedging activities.
F-9
<PAGE>
- - --------------------------------------------------------------------------------
Fortune Entertainment Corporation
NOTES TO FINANCIAL STATEMENTS
================================================================================
December 31, 1997
3. BUSINESS ACQUISITIONS
[a] Fortune Entertainment Corporation (Bahamas)
On October 14, 1997 the Company acquired all of the issued and outstanding
share stock from shareholders of Fortune Entertainment Corporation (Bahamas),
("FECB"), for the following consideration:
# of Shares $
- - -------------------------------------------------------------------------------
Purchase price 1,542,657
- - -------------------------------------------------------------------------------
Consideration given:
Common Stock 1,090,464 385,665
Series A Preferred Stock 1,090,464 385,664
Series B Preferred Stock 1,090,464 385,664
Series C Preferred Stock 1,090,464 385,664
- - -------------------------------------------------------------------------------
1,542,657
===============================================================================
All of the Preferred Stock is convertible at specific dates as described in
Note 9 [a]. The value ascribed to the shares as shown above represents the
value of the issued and outstanding share stock of FECB immediately prior to
the transaction.
The purchase price has been allocated according to the estimated fair values of
the assets and liabilities of FECB as follows:
$
- - ----------------------------------------------------------------------------
Cash 26,150
Accounts receivable 17,268
Prepaid expenses 10,123
Property and equipment 66,100
Investment in Advanced Gaming Technology, Inc. [Note 5] 990,000
PVA Electronic Tournament Poker [Note 4] 321,986
Accounts payable (23,480)
Loan payable (250,000)
Due to related parties (228,950)
Goodwill on acquisition 613,460
- - ----------------------------------------------------------------------------
Total 1,542,657
============================================================================
F-10
<PAGE>
- - --------------------------------------------------------------------------------
Fortune Entertainment Corporation
NOTES TO FINANCIAL STATEMENTS
================================================================================
December 31, 1997
3. BUSINESS ACQUISITIONS (continued)
[b] Professional Video Association, Inc.
Pursuant to a Purchase and Sale Agreement (the "Agreement") dated September 5,
1997 with William Danton and Video Lottery Consultants, Inc. (the "Danton
Group"), the Company has acquired 100% of the remaining issued share stock of
Professional Video Association, Inc. ("PVA"). Details of this acquisition are
as follows:
<TABLE>
<CAPTION>
# of Shares $
- - --------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment in PVA acquired in the FECB acquisition 321,986
[Note 3[a]]
Cash paid to December 31, 1997 pursuant to the Agreement 35,000
- - --------------------------------------------------------------------------------------------------
Sub-total 356,986
- - --------------------------------------------------------------------------------------------------
Cash payments due:
1998 1,906,986
1999 500,000
2000 500,000
2001 433,014
- - --------------------------------------------------------------------------------------------------
Sub-total 3,340,000
- - --------------------------------------------------------------------------------------------------
Common shares to be issued in 1998 705,000 1,410,000
- - --------------------------------------------------------------------------------------------------
Total 5,106,986
==================================================================================================
</TABLE>
All of the common shares were issued at an ascribed value of $2.00 per share
being the guaranteed amount pursuant to the "top-up-Provision" discussed in
Note 11[d] and accounted for pursuant to Emerging Issues Task Force Abstract
97-10. PVA was originally formed to capitalize on the patented software
invention ("Intellectual Property") of a skill poker software game known as
PVA Electronic Tournament Poker. The entire purchase price has been allocated
to the Intellectual Property [see Note 4].
On or before December 31, 1998, the Company has the option to pay the
outstanding balance of the consideration with respect to this agreement
without bonus or penalty at a 5% discount.
The acquisition of PVA includes the assumption of a Manufacturing Agreement
dated April 24, 1997 with Amusement World, Inc. to have them manufacture PVA
Terminals. The term of the agreement is April 24, 1997 to April 23, 2007 and
PVA is committed to placing purchase orders for a minimum of 333 PVA Terminals
per year during the first three years of this agreement.
F-11
<PAGE>
- - --------------------------------------------------------------------------------
Fortune Entertainment Corporation
NOTES TO FINANCIAL STATEMENTS
================================================================================
December 31, 1997
4. INTELLECTUAL PROPERTY
Intellectual property consists of the patented software invention discussed in
Note 3[b] and known as PVA Electronic Tournament Poker.
To the extent that the Company sublicenses rights derived from PVA Electronic
Tournament Poker, the Company must pay the Danton Group 20% of all up-front
licensing fees paid or payable to the Company. Also commencing April 2, 1998
(the "Trigger Date"), and continuing on the annual anniversary date of the
Trigger Date and every year during either the life of the patent, which forms
part of the Intellectual Property, and any extension of the patent, the
Company must issue common stock to Mr. Danton equivalent to the Predetermined
Percentages times Net Earnings divided by the Average Share Price. The
Agreement provides the following definitions for this formula:
o Predetermined Percentages are 2% in year one, 3% in year two, 4% in year
three, 5% in year four and 10% in year 5 and thereafter, provided that the
percentage will automatically increase to 10% once Net Earnings are at
least $10,000,000.
o Net Earnings represents earnings from the revenues derived from the
Intellectual Property before income tax, depreciation and amortization.
o Average Share Price refers to the average trading price of the Company's
common stock on the NASD OTC Bulletin Board for the last 30 trading days of
the fiscal year.
Until the Company meets all of the above obligations in a timely manner, the
PVA stock is subject to a Stock Pledge Agreement whereby Mr. Danton has been
granted a security interest in 60% of the issued and outstanding PVA stock
which provides for the right of Mr. Danton to obtain ownership and control of
the pledged stock if the Company defaults under this Agreement. While the
Stock Pledge Agreement is in place, the Company is not permitted to change,
amend or modify its bylaws and certificate of Incorporation; sell, convey or
transfer any of the assets associated with this Agreement; or incur any debt,
liability or other obligation or responsibility outside the ordinary course of
business without the prior written consent of the Danton Group. Additionally,
Mr. Danton has been granted an option to purchase the other 40% of the issued
and outstanding PVA stock upon default of this Agreement by the Company at a
price equivalent to that paid by the Company.
F-12
<PAGE>
- - --------------------------------------------------------------------------------
Fortune Entertainment Corporation
NOTES TO FINANCIAL STATEMENTS
================================================================================
December 31, 1997
5. INVESTMENTS
Investments consist of the following:
1997
$
- - ------------------------------------------------------------------------------
Advanced Gaming Technology, Inc. 1,034,014
Less valuation reserve (1,034,013)
- - ------------------------------------------------------------------------------
1
==============================================================================
Advanced Gaming Technology, Inc. ("AGT") is engaged in the business of
designing and developing electronic bingo products. In a July 17, 1996
agreement AGT granted FECB the right to financially participate in a number of
gaming ventures in which AGT has an interest:
[i] The acquisition of a 15% carried interest in AGT's interest in a United
Kingdom Bingo Project.
The Company has incurred expenses relating to the United Kingdom Bingo
Project development of $44,014 following its initial $990,000 investment
made in connection with its acquisition of FECB.
[ii] The Company has the right to acquire an 18.75% interest in AGT's interest
in the development and marketing of the SEGA Sonic Bingo(TM) game. Sonic
Bingo is a joint venture between AGT and Sega Gaming Technology, Inc.
("SEGA").
By a letter agreement dated March 30, 1998, AGT agreed to purchase back the
Company's interest in the United Kingdom Bingo Project and the SEGA Sonic
Bingo Project for $990,000. AGT had agreed to issue a promissory Note to the
Company for the project purchase amount and collaterize the Note with the two
projects. AGT has failed to issue the agreed upon promissory Note and the
related security. The Company has issued a writ against AGT and is in the
process of trying to obtain a judgment against the Company. AGT has filed a
statement of defense denying most of the claims and declaring the agreement
void. Additionally management of the Company has been advised that AGT does
not currently have the resources to repay the Company at this time and as a
result a valuation reserve has been recorded against the investment.
F-13
<PAGE>
- - --------------------------------------------------------------------------------
Fortune Entertainment Corporation
NOTES TO FINANCIAL STATEMENTS
================================================================================
December 31, 1997
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31, 1997
-------------------------------
Accumulated
Cost Depreciation
$ $
==============================================================================
Furniture and equipment 53,054 2,884
Computer equipment and software 12,812 1,076
Leasehold improvements 6,251 350
- - ------------------------------------------------------------------------------
72,117 4,310
- - ------------------------------------------------------------------------------
67,807
==============================================================================
7. RELATED PARTY TRANSACTIONS
[a] The amounts due to related parties consist of advances from shareholders
acting as directors and officers. These amounts are without interest or
stated terms of repayment.
[b] Management fees of $126,050 have been expensed related to shareholders
acting as directors and officers and are included in the amounts due to
related parties.
8. LOANS PAYABLE
Loans payable consist of the following:
1997
$
- - -----------------------------------------------------------------------------
B. Benedet Holdings Inc., due on demand with interest
at 10% per annum 200,000
Internet TV Corporation, due on demand without interest 48,849
Clearly Advanced Holdings Ltd., due August 31, 1998 with
interest at 10% per annum 85,822
- - -----------------------------------------------------------------------------
334,671
==============================================================================
F-14
<PAGE>
- - --------------------------------------------------------------------------------
Fortune Entertainment Corporation
NOTES TO FINANCIAL STATEMENTS
================================================================================
December 31, 1997
9. SHARE STOCK
[a] Authorized
Holders of the Common Stock are entitled to one vote per share and to
share equally in any dividends declared and in distributions in
liquidation.
The Preference Stock is non-cumulative, non-voting and convertible into
Common Stock at the option of the holder of the Preference Stock at the
rate of one Preferred Share to one Common Share for no additional
consideration. The holders of the different classes of Preference Stock
are entitled to commence conversion of their shares as follows:
Class A: May 20, 1998;
Class B: August 20, 1998; and
Class C: November 30, 1998.
[b] Issued
<TABLE>
<CAPTION>
Number of Shares $
- - --------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock
Shares issued for cash 1,000,000 110
Shares issued related to FET, Inc. [Note 1] 2,175,456 5,175
Shares issued related to FECB [Note 3[a]] 1,090,464 385,665
- - --------------------------------------------------------------------------------------------------
Total Common Stock, December 31, 1997 4,265,920 390,950
==================================================================================================
Class A Preferred Stock
Shares issued related to FECB [Note 3[a]] 1,090,464 385,664
- - --------------------------------------------------------------------------------------------------
Balance, December 31, 1997 1,090,464 385,664
- - --------------------------------------------------------------------------------------------------
Class B Preferred Stock
Shares issued related to FECB [Note 3[a]] 1,090,464 385,664
- - --------------------------------------------------------------------------------------------------
Balance, December 31, 1997 1,090,464 385,664
- - --------------------------------------------------------------------------------------------------
Class C Preferred Stock
Shares issued related to FECB [Note 3[a]] 1,090,464 385,664
- - --------------------------------------------------------------------------------------------------
Balance, December 31, 1997 1,090,464 385,664
- - --------------------------------------------------------------------------------------------------
Total Preferred Stock, December 31, 1997 3,271,392 1,156,992
==================================================================================================
</TABLE>
F-15
<PAGE>
- - --------------------------------------------------------------------------------
Fortune Entertainment Corporation
NOTES TO FINANCIAL STATEMENTS
================================================================================
December 31, 1997
9. SHARE STOCK (continued)
[c] As at December 31, 1997, the Company had received cash in the amount of
$265,000 representing subscriptions received for the issue of 140,000
common shares. These shares were issued in fiscal 1998.
[d] Pursuant to the acquisition of PVA described in Note 3[b], the Company is
committed to issue an additional 705,000 common shares at an ascribed
value of $2.00 per share being a total value of $1,410,000. These shares
were issued in fiscal 1998. Also refer to Note 11[d].
[e] During the period, the Company issued 1,050,000 options to employees and
consultants to acquire 1,050,000 common shares of the Company at an
exercise price of $0.30 and expiring October 14, 2002 (5 years).
Additionally the Company also issued 500,000 warrants to employees and
consultants to acquire 500,000 common shares of the Company at an
exercise price of $0.30 and expiring December 31, 2001 (5 years). None of
the options or warrants were exercised during the period.
As explained in Note 2, the Company elected to apply the disclosure
option contained in SFAS No. 123 and accordingly no compensation cost has
been recognized. Had compensation cost been determined based on the fair
value at the grant dates for those options and warrants issued to
employees and consultants, consistent with the method described in SFAS
No. 123, the Company's net loss and loss per share would have been
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
$
---------------------------------------------------------------------------------------------
<S> <C> <C>
Net income As reported (1,456,114)
Pro forma (2,634,114)
Basic and diluted loss per share As reported (1.26)
Pro forma (2.29)
---------------------------------------------------------------------------------------------
</TABLE>
The fair value of each option or warrant grant is estimated on the date
of the grant using the Minimum Value option-pricing model with the
following assumptions; no dividend yield; no volatility as the Company's
stock was not trading at the grant date; risk-free interest rate of 8.5%
and an expected life of 5 years.
[f] The basic and diluted loss per share for the period ended December 31, 1997
is based on the following: August 19, 1997 to December 31, 1997
August 19, 1997 to
December 31, 1997
Net loss for the period $(1,456,114)
Weighted average number of common shares used
in computation 1,152,484
------------
Basic and diluted loss per share $ (1.26)
============
F-16
<PAGE>
- - --------------------------------------------------------------------------------
Fortune Entertainment Corporation
NOTES TO FINANCIAL STATEMENTS
================================================================================
December 31, 1997
10. INCOME TAXES
At December 31, 1997, the Company has a U.S. tax net operating loss
approximating $172,000, which will begin to expire in 2012 if not utilized.
The Company may have incurred "ownership changes" pursuant to applicable
Regulations in effect under Section 382 Internal Revenue Code of 1986, as
amended. Therefore, the Company's use of losses incurred through the date of
these ownership changes may be limited during the carryforward period.
The Company has non-U.S. tax net operating losses approximating $130,000
resulting from operations in Canada. These losses will expire in 2004.
Deferred income taxes reflect the net 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
recognized a valuation allowance equal to the deferred tax assets due to the
uncertainty of realizing the benefits of the assets. Significant components of
the Company's deferred tax assets and liabilities as of December 31 are a
follows:
$
- - -------------------------------------------------------------------------
Deferred Tax Assets:
Net operating loss carryforwards 117,900
Depreciation/Amortization 10,100
Other 21,000
- - -------------------------------------------------------------------------
Total Deferred Tax Assets 149,000
Total Deferred Tax Liabilities --
- - -------------------------------------------------------------------------
Net Deferred Tax Assets 149,000
Valuation Allowance (149,000)
- - -------------------------------------------------------------------------
Net Deferred Taxes --
- - -------------------------------------------------------------------------
F-17
<PAGE>
- - --------------------------------------------------------------------------------
Fortune Entertainment Corporation
NOTES TO FINANCIAL STATEMENTS
================================================================================
December 31, 1997
11. SUBSEQUENT EVENTS
In addition to the events discussed in [Note 5, the following significant
events have occurred subsequent to December 31, 1997:
[a] On April 9, 1998, the Company acquired 62,500 shares of SEGA (also see Note
5) for $500,000 cash and obtained an exclusive option until December 31,
1998 to acquire an additional 62,500 shares for $550,000 cash.
Additionally, in July, 1998, the Company has placed $311,250 cash in their
lawyer's trust account to acquire an additional 37,500 shares of SEGA.
Upon completion of this transaction the Company will own a total of
100,000 common shares of SEGA for a total consideration of $811,250 and
have an exclusive option to acquire the previously discussed 62,500
additional shares for $550,000.
[b] From the period January 1, 1998 to July 31, 1998, the Company has raised
approximately $1,389,300 in private placements and as a result has issued
a further 1,829,000 Common Shares in the Company associated with these
offerings.
[c] Pursuant to an Asset Acquisition Agreement (the "Agreement") effective
July 31, 1998, with Team Rainbow Inc. ("TRI"), the Company purchased 100%
of the rights, assets and business of TRI relating to a multi-positional
blackjack game known as "Rainbow 21" for the following consideration:
Consideration given: # of Shares $
-----------------------------------------------------------------------
Deposit 10,000
Cash 262,500
Common shares issued July 31, 1998 250,000 562,500
-----------------------------------------------------------------------
835,000
=======================================================================
All of the common shares were issued at an ascribed value of $2.25 per
share being the guaranteed amount pursuant to [i] below and accounted for
pursuant to Emerging Issues Task Force Abstract 97-10.
F-18
<PAGE>
- - --------------------------------------------------------------------------------
Fortune Entertainment Corporation
NOTES TO FINANCIAL STATEMENTS
================================================================================
December 31, 1997
11. SUBSEQUENT EVENTS (continued)
The Company has the following obligations to TRI as a result of this
transaction:
[i] If during the last five trading days in the twelfth month after the
option exercise date, the simple average closing price for the shares
traded on the public market ("Market price") does not equal or exceed
$2.25 per share, the Company must either:
o pay TRI the difference between $562,500 less 250,000 multiplied
by the Market Price (the "Difference"); or
o deliver to TRI additional shares of the same class as the shares
having a value equal to the Difference, with such additional
shares being valued at the Market Price.
[ii] To pay TRI $12,500 by July 31, 1998 and a total of $250,000 in equal
quarterly installments over the four year period ending July 31, 2002.
[iii] To pay TRI in quarterly installments, the greater of $50,000 or
10% of the net revenues from Rainbow 21 for the twelve months ended
July 31, 1999.
[iv] To pay TRI in quarterly installments, the greater of $150,000 or 10%
of the net revenues from Rainbow 21 for the twelve month period ended
July 31, 2000.
[v] Commencing July 31, 2001, the Company must pay additional
consideration of 5% of the net revenues from Rainbow 21 for the
preceding twelve month period.
Any further stock issued pursuant to [i] above will be recorded at no
value since the shares issued have already been valued at their maximum
amount of $2.25 per share. Payments made under [iii] to [v] above which
are based on net revenues will be expensed in the year they are incurred
as royalty payments. The entire purchase price will be allocated to
intangible assets.
[d] On July 9, 1998 the Agreement with the Danton Group to acquire 100% of
the issued share stock of PVA was amended. The cash payments due during
the years 1998 to 2001 of $3,340,000 in aggregate may at the Company's
option be settled in 1,142,500 shares of the Company's common stock plus
cash payments to be made on the following dates:
$
---------------------------------------------------------------------------
By June 17, 1998 350,000
By October 30, 1998 250,000
By December 30, 1998 250,000
By March 30, 1999 205,000
---------------------------------------------------------------------------
1,055,000
===========================================================================
F-19
<PAGE>
- - --------------------------------------------------------------------------------
Fortune Entertainment Corporation
NOTES TO FINANCIAL STATEMENTS
================================================================================
December 31, 1997
11. SUBSEQUENT EVENTS (continued)
This event will be treated as a settlement of debt in exchange for
treasury shares. The shares are being recorded at their estimated $2.00
per share market value, being the trading value of the shares shortly
before and after July 9, 1998 and consistent with the "top-up Provision"
of the Agreement described in the following paragraph and accounted for
pursuant to Emerging Issues Task Force Abstract 97-10.
The Agreement contains a "top-up provision" which provides that if during
the period commencing on the date that all of the stock issued to the
Danton Group becomes fully registered under the Securities Act of 1933 as
amended (the "Trading Date'), and ending on a date 60 days after the
Trading Date, the shares of the Company trading on the OTC Bulletin Board
(the "Board") have not for 45 days had a closing bid price per share of
at least $2.00, then, to the extent that the Danton Group stock is held
on the 60th day, the Company must pay the Danton Group the difference
between $2.00 per share and the greater of $0.50 per share and the
average bid closing price of shares of the Company's stock trading on the
Board for the 10 days preceding the 60th day. This difference must be
paid on or before June 9, 1999 in cash or stock. Any further stock issued
pursuant to this top-up provision will be recorded at no value since the
shares issued have already been valued at their maximum amount of $2.00
per share.
In 1998, PVA changed its name to Fortune Poker, Inc.
[e] On February 18, 1998, the Company had its registration information
statement approved by NASD for the OTC Bulletin Board and was assigned a
trading symbol FETG. The stock commenced trading on May 11, 1998.
F-20
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
F-21
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
CONSOLIDATED BALANCE SHEET
AS AT JUNE 30, 1998
ASSETS $ $
CURRENT
Cash and short-term deposits 410,046
Accounts receivable 23,127
Prepaid expenses and deposits 11,413 444,586
-------
LONG-TERM INVESTMENTS - Sega Gaming
Technology, Inc. (Note 4) 800,000
INTELLECTUAL PROPERTY - Fortune Video Poker
- net of accumulated amortization (Note 3(b)) 4,851,637
INTELLECTUAL PROPERTY - Rainbow 21TM
- net of accumulated amortization (Note 5) 793,250
CAPITAL ASSETS - net of accumulated depreciation 58,629
GOODWILL - net of accumulated amortization (Note 3(a)) 569,509
---------
7,517,611
=========
/s/ David B. Jackson /s/ D. Bruce Horton
------------------------ -------------------------
David B. Jackson D. Bruce Horton
Director Director
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES $ $
<S> <C> <C>
CURRENT
Accounts payable and accrued liabilities 169,657
Due to related parties 241,611
Loans payable 442,656
Technology purchase consideration payable
- current portion 512,500 1,366,424
-------
TECHNOLOGY PURCHASE CONSIDERATION PAYABLE 455,000
---------
1,821,424
---------
SHAREHOLDERS' EQUITY
SHARE CAPITAL (Note 7)
Common Stock, $0.0001 par value
30,000,000 authorized, 9,342,306 issued and outstanding 934
---------
Class A, Preferred Stock, $0.0001 par value, convertible
1,100,000 authorized, 423,078 issued and outstanding 42
Class B, Preferred Stock, $0.0001 par value, convertible
1,100,000 authorized, 1,090,464 issued and outstanding 109
Class C, Preferred Stock, $0.0001 par value, convertible
1,100,000 authorized, 1,090,464 issued and outstanding 109
---------
260
---------
ADDITIONAL PAID-IN CAPITAL 7,305,168
SHARE CAPITAL TO BE ISSUED 862,500
RETAINED EARNINGS (DEFICIT) (2,472,675)
---------
7,517,611
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
$ $
REVENUE NIL
<S> <C> <C>
OPERATING EXPENSES
Amortization of goodwill 30,673
Amortization of intellectual property - Fortune Poker 255,349
Amortization of intellectual property - Rainbow 21(TM) 41,750
Bank charges and interest 48,140
Consulting fees 167,283
Depreciation 9,178
Management fees 125,000
Office 15,728
Professional fees 97,652
Rent 22,586
Salaries and wages 51,920
Telephone, fax and Internet 98,318
Transfer agent fees and filings 8,514
Travel, promotion and entertainment 40,837
Vehicle 3,633 1,016,561
--------- ---------
NET LOSS FOR THE PERIOD (1,016,561)
RETAINED EARNINGS (DEFICIT) - BEGINNING OF PERIOD (1,456,114)
---------
RETAINED EARNINGS (DEFICIT) - END OF PERIOD (2,472,675)
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
$
OPERATING ACTIVITIES
<S> <C>
Net loss for the period (1,016,561)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of intangible assets 327,772
Depreciation 9,178
Expenses settled by issue of share stock 125,020
Changes in operating assets and liabilities:
Accounts receivable 5,056
Prepaid expenses and other current assets 11,084
Accounts payable and accrued liabilities 93,867
----------
Net cash used in operating activities (444,584)
---------
INVESTING ACTIVITIES
Acquisition of investments (500,000)
Acquisition of intellectual property (350,000)
---------
Net cash used in investing activities (850,000)
---------
FINANCING ACTIVITIES
Proceeds from capital contributions 923,400
Share subscriptions received 750,000
Borrowings under loans payable 107,985
Repayments to related parties (118,645)
----------
Net cash provided by financing activities 1,662,740
Net increase in cash during the period 368,156
Cash, beginning of period 41,890
-----------
Cash, end of period 410,046
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
1. FORMATION AND BUSINESS OF THE COMPANY
Fortune Entertainment Corporation was incorporated on August
25, 1997, in Delaware. On September 16, 1997, the Company
acquired all of the issued and outstanding share stock from
shareholders of FET, Inc. (a Colorado corporation,
incorporated August 19, 1997) for consideration of 2,175,456
common shares of the Company. As a result of this
acquisition, the previous shareholders of FET, Inc., as a
group, owned more than fifty percent (50%) of the issued and
outstanding voting shares of the Company. Consequently, this
business combination has been accounted for as a reverse
acquisition, whereby FET, Inc. is deemed to have acquired
the Company. This reverse acquisition was entered into in
order to facilitate access to public equity markets in the
United States. Fortune Entertainment Corporation is the
surviving corporation and is committed to developing gaming
and entertainment products for both North American and
International markets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts
of Fortune Entertainment Corporation (Delaware), and its
wholly-owned subsidiaries, Fortune Entertainment Corporation
(Bahamas), Fortune Entertainment Corporation (British
Columbia, Canada), and Fortune Poker, Inc. (Delaware). All
significant inter-company accounts have been eliminated.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are being
depreciated on a straight-line basis over the estimated
useful lives of the related assets (2-5 years). Leasehold
improvements are amortized on a straight-line basis over the
shorter of the remaining lease term or the estimated lives.
INTANGIBLE ASSETS
Goodwill is being amortized on a straight-line basis over
ten (10) years commencing October 14, 1997. The Intellectual
Properties for the tournament video poker (Fortune Poker,
Inc.) and Rainbow 21TM are being amortized on a
straight-line basis over ten (10) years.
F-26
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
3. BUSINESS ACQUISITIONS
(a) FORTUNE ENTERTAINMENT CORPORATION (BAHAMAS)
On October 14, 1997, Fortune Entertainment Corporation
(Delaware) acquired all of the issued and outstanding share
stock from shareholders of Fortune Entertainment Corporation
(Bahamas).
The consideration was $1,542,657 and Fortune Entertainment
Corporation (Delaware) issued 1,090,464 common shares,
1,090,464 Series A preferred stock shares, 1,090,464 Series
B preferred stock shares and 1,090,464 Series C preferred
stock shares. The goodwill relating to this acquisition
amounted to $613,460.
(b) FORTUNE POKER, INC. (formerly PROFESSIONAL VIDEO ASSOCIATION, INC.)
Fortune Entertainment Corporation has acquired one hundred
percent (100%) of the issued share stock of Fortune Poker,
Inc. for the following consideration:
$
Cash payments made to June 30, 1998 706,986
Common shares issued April 6, 1998
505,000 shares @ $2.00 per share 1,010,000
Common shares issued June 9, 1998
995,000 shares @ $2.00 per share 1,990,000
Common shares issued June 9, 1998
200,000 shares @ $2.00 per share 400,000
Common shares issued June 22, 1998
147,500 shares @ $2.00 per share 295,000
Cash payment due October 30, 1998 250,000
Cash payment due December 30, 1998 250,000
Cash payment due March 30, 1999 205,000
---------
5,106,986
=========
F-27
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
The Company was acquired to capitalize on the Intellectual
Property of a skill tournament video poker technology. All
the common shares were issued at an ascribed value of $2.00
per share being the guaranteed amount pursuant to the top-up
provision.
To the extent that the Company sublicenses rights derived
from the Intellectual Property, the Company must pay the
Danton Group 20% of all up-front licensing fees. Also
commencing 120 days after the Company's first fiscal year
ending after November 25, 1997 (the Trigger Date), and
continuing on the annual anniversary date of the Trigger
Date and every year during the life of the patent, which
forms part of the Intellectual Property, and any extension
of the patent, the Company must issue common stock to the
Danton Group equivalent to the Predetermined Percentages
times Net Earnings divided by the Average Share Price.
The Predetermined Percentages are 2% in year one, 3% in year
two, 4% in year three, 5% in year four, and 10% in year five
and thereafter, provided that the percentage will
automatically increase to 10% once Net Earnings are at least
$10,000,000. Year one commences November 25, 1997.
Until the Company meets all of its obligations under the
agreement, the Fortune Poker, Inc. stock is subject to a
Stock Pledge Agreement whereby the Danton Group has been
granted a security interest in 60% of the issued and
outstanding Fortune Poker, Inc. stock. Additionally, the
Danton Group has been granted an option to purchase the
other 40% of the Fortune Poker, Inc. stock upon default of
this Agreement by the Company at a price equivalent to that
paid by the Company.
4. INVESTMENTS - SEGA GAMING TECHNOLOGY, INC.
As at June 30, 1998, Fortune Entertainment Corporation (FEC)
owned 62,500 shares of Sega Gaming Technology, Inc. (SGTI).
On July 28, the Company acquired an additional 37,500
shares, and on August 25, the Company placed funds in their
lawyer's trust account to acquire an additional 31,250
shares. After the August 25th transaction, Fortune
Entertainment Corporation owns 131,250 shares of SGTI, which
represent an 11.13% equity interest in the Company.
Fortune Entertainment Corporation has made additional
arrangements to purchase 31,250 shares on September 30,
1998, and 62,500 shares on October 15, 1998. Once these
transactions have been completed, FEC will be the largest
single shareholder of SGTI, owning 225,000 shares
representing a 19.08% equity interest in the Company.
F-28
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
5. RAINBOW 21(TM) ACQUISITION
Pursuant to an Asset Acquisition Agreement, the Company has
acquired the Rainbow 21(TM) Intellectual Property from Team
Rainbow Inc. The Company purchased 100% of the rights,
assets and business relating to a multi-positional Blackjack
game.
Consideration for the Intellectual Property acquisition is:
$
Initial deposit amount 10,000
Common shares issued June 18, 1998, in lieu of
technology purchase consideration payments
200,000 shares @ $2.25 per share 450,000
Payment made July 24, 1998 10,000
Common shares issued August 5, 1998, in lieu of
technology purchase consideration payments
50,000 shares @ $2.25 per share 112,500
Payment due August 31, 1998 2,500
Minimum royalty payment requirements
over the four-year period ending July 31, 2002 250,000
-------
835,000
=======
All of the common shares were issued at an ascribed value of
$2.25 per share, being the guaranteed amount pursuant to the
top-up provision of the agreement. In addition, the Company
must make minimum royalty payments to Team Rainbow Inc. of
$250,000 in equal annual installments over the four-year
period ending July 31, 2002.
6. RELATED PARTY TRANSACTIONS
(a) The amounts due to related parties consist of advances from
shareholders acting as directors and officers. These amounts
are without interest or stated terms of repayment.
(b) Management fees of $125,000 have been expensed relating to
shareholders acting as directors and officers, and are
included in the amounts due to related parties.
F-29
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
7. SHARE CAPITAL
(a) Holders of the Common Stock are entitled to one vote per
share, and to share equally in any dividends declared and in
distributions in liquidation.
The Preferred Stock is non-cumulative, non-voting and
convertible into Common Stock at the option of the holder of
the Preference Stock at the rate of one Preferred Share to
one Common Share for no additional consideration.
The holders of the different classes of Preferred Stock are
entitled to commence conversion of their shares on the
following dates:
Class A May 20, 1998
Class B August 20, 1998
Class C November 20, 1998
(b) As at June 30, 1998, the Company had received cash in the
amount of $750,000 representing subscriptions received for
the issue of 1,000,000 common shares. These shares were
issued in July of 1998.
(c) Pursuant to the acquisition of Rainbow 21TM from Team
Rainbow Inc., the Company agreed to issue 50,000 common
shares at an ascribed value of $2.25 per share (in line with
Technology purchase consideration payments) for a total
value of $112,500. These shares were issued in July of 1998.
8. PUBLIC COMPANY STATUS
On February 18, 1998, Fortune Entertainment Corporation
(FEC) had its registration information statement approved by
NASD for the OTC Bulletin Board and was assigned the trading
symbol FETG. The common stock of the Company commenced
trading on May 11, 1998.
FEC is in the process of completing a Form 10 registration
statement to entitle the Company to obtain a fully reporting
status.
F-30
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
& CASH FLOWS
FORTUNE ENTERTAINMENT
CORPORATION (BAHAMAS)
April 2, 1996 to December 31, 1996 and
January 1, 1997 to December 31, 1997
F-31
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Directors of
Fortune Entertainment Corporation (Bahamas)
We have audited the accompanying consolidated statements of operations and cash
flows of Fortune Entertainment Corporation (Bahamas) for the year ended December
31, 1997 and the period from incorporation on April 2, 1996 to December 31,
1996. 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 United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Fortune
Entertainment Corporation (Bahamas) for the year ended December 31, 1997 and the
period from incorporation on April 2, 1996 to December 31, 1997, in conformity
with accounting principles generally accepted in the United States.
/s/ Ernst & Young
Vancouver, Canada, --------------------
March 6, 1998 Chartered Accountants
F-32
<PAGE>
Fortune Entertainment Corporation (Bahamas)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
incorporation on
January 1, 1997 to April 2, 1996 to
December 31, 1997 December 31, 1996
$ $
- - --------------------------------------------------------------------------------------------------
<S> <C>
EXPENSES
Advertising 1,941 --
Bank charges and interest 12,363 437
Depreciation 11,618 --
Foreign exchange loss 4,681 --
Management fees [note 3] 228,950 --
Office and miscellaneous 100,869 4,228
Professional fees 142,648 27,728
Rent 37,337 --
Salaries and wages 113,560 --
Travel, promotion and entertainment 106,873 21,702
- - --------------------------------------------------------------------------------------------------
760,840 54,095
- - --------------------------------------------------------------------------------------------------
Loss before the following: (760,840) (54,095)
Investment valuation reserve [note 4] (1,034,013) --
- - --------------------------------------------------------------------------------------------------
Loss for the period (1,794,853) (54,095)
- - --------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
F-33
<PAGE>
Fortune Entertainment Corporation (Bahamas)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
incorporation on
January 1, 1997 to April 2, 1996 to
December 31, 1997 December 31, 1996
$ $
- - --------------------------------------------------------------------------------------------------
<S> <C>
OPERATING ACTIVITIES
Loss for period (1,794,853) (54,095)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 11,618 --
Investment valuation reserve 1,034,013 --
Changes in operating assets and liabilities:
Accounts receivable 31,749 (59,932)
Prepaid expenses and other current assets (10,661) (11,835)
Accounts payable and accrued liabilities 74,756 1,034
- - --------------------------------------------------------------------------------------------------
Net cash used in operating activities (653,378) (124,828)
- - --------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Acquisition of property and equipment (79,425) --
Acquisition of investments and intellectual property (236,000) (1,165,000)
- - --------------------------------------------------------------------------------------------------
Net cash used in investing activities (315,425) (1,165,000)
- - --------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from capital contributions 235,100 1,307,557
Borrowings under loans payable 334,671 --
Advances from related parties 423,193 --
- - --------------------------------------------------------------------------------------------------
Net cash provided by financing activities 992,964 1,307,557
- - --------------------------------------------------------------------------------------------------
Net increase in cash during the period 24,161 17,729
Cash, beginning of period 17,729 --
- - --------------------------------------------------------------------------------------------------
Cash, end of period 41,890 17,729
- - --------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
F-34
<PAGE>
Fortune Entertainment Corporation (Bahamas)
NOTES TO CONSOLIDATED STATEMENTS OF
OPERATIONS & CASH FLOWS
Year ended December 31, 1997 and period from incorporation on April 2, 1996 to
December 31, 1996
1. FORMATION AND BUSINESS OF THE COMPANY
Fortune Entertainment Corporation (Bahamas) (the "Company") was incorporated on
April 2, 1996 in the Bahamas and is committed to developing gaming and
entertainment products for both the North American and International markets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated statements of operations and cash flows include the accounts of
the Company and its wholly-owned subsidiaries, Fortune Entertainment Corporation
(British Columbia, Canada) and Professional Video Association, Inc. (Delaware).
All significant intercompany accounts and transactions have been eliminated.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from these estimates.
Income taxes
The Company uses the liability method of accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on the
difference between financial statement and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that are expected to be in
effect when the differences are expected to reverse. Recognition of deferred tax
assets is limited to amounts considered by management to be more likely than not
of realization in future periods.
Advertising costs
Advertising costs are expensed as incurred.
F-35
<PAGE>
Fortune Entertainment Corporation (Bahamas)
NOTES TO CONSOLIDATED STATEMENTS OF
OPERATIONS & CASH FLOWS
Year ended December 31, 1997 and period from incorporation on April 2, 1996 to
December 31, 1996
Investments and accounting for impairment of long-lived assets
Investments are recorded at the lesser of historical cost or net recoverable
value. The Company continually evaluates whether events and circumstances have
occurred indicating the remaining estimated useful life of long-lived assets may
warrant revision, or long-lived asset balances may not be recoverable. If
factors indicate long-lived assets have been impaired, the Company uses an
estimate of the remaining value of the long-lived assets in measuring
recoverability. Unrecoverable amounts are charged to operations in the
applicable period.
Recent pronouncements
During June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." The Company has no items which give
rise to comprehensive income.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise on Related Information", which changes the way public companies
report information about operating segments. The Company has one segment for
reporting purposes.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Post Retirement Benefits". The Company does not have any such
plans for its employees.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities". The Company does not have any derivatives or engage in
hedging activities.
3. RELATED PARTY TRANSACTIONS
Management fees of $228,950 have been expensed related to shareholders acting as
directors and officers.
F-36
<PAGE>
Fortune Entertainment Corporation (Bahamas)
NOTES TO CONSOLIDATED STATEMENTS OF
OPERATIONS & CASH FLOWS
Year ended December 31, 1997 and period from incorporation on April 2, 1996 to
December 31, 1996
4. INVESTMENT VALUATION RESERVE
The investment valuation reserve relates to the Company's investment in Advanced
Gaming Technology, Inc. ("AGT") which is engaged in the business of designing
and developing electronic bingo products. In a July 17, 1996 agreement AGT
granted the Company the right to financially participate in a number of gaming
ventures in which AGT has an interest:
[i] The acquisition of a 15% carried interest in AGT's interest in a United
Kingdom Bingo Project.
[ii] The Company has the right to acquire an 18.75% interest in AGT's interest
in the development and marketing of the SEGA Sonic Bingo(TM) game. Sonic
Bingo is a joint venture between AGT and Sega Gaming Technology, Inc.
("SEGA").
By a letter agreement dated March 30, 1998, AGT agreed to purchase back the
Company's interest in the United Kingdom Bingo Project and the SEGA Sonic Bingo
Project for $990,000. AGT had agreed to issue a promissory Note to the Company
for the project purchase amount and collaterize the Note with the two projects.
AGT has failed to issue the agreed upon promissory Note and the related
security. The Company has issued a writ against AGT and is in the process of
trying to obtain a judgment against the Company. AGT has filed a statement of
defense denying most of the claims and declaring the agreement void.
Additionally management of the Company has been advised that AGT does not
currently have the resources to repay the Company at this time and as a result a
valuation reserve has been recorded against the investment.
F-37
<PAGE>
Fortune Entertainment Corporation (Bahamas)
NOTES TO CONSOLIDATED STATEMENTS OF
OPERATIONS & CASH FLOWS
Year ended December 31, 1997 and period from incorporation on April 2, 1996 to
December 31, 1996
5. INCOME TAXES
The Company has non-U.S. tax net operating losses approximating $130,000
resulting from operations in Canada. These losses will expire in 2004.
Deferred income taxes reflect the net 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 recognized a
valuation allowance equal to the deferred tax assets due to the uncertainty of
realizing the benefits of the assets. Significant components of the Company's
deferred tax assets and liabilities as of December 31 are a follows:
1997
$
- - --------------------------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforwards 59,300
Depreciation 5,300
Other 21,000
- - --------------------------------------------------------------------------------
Total deferred tax assets 85,600
Total deferred tax liabilities --
- - --------------------------------------------------------------------------------
Net deferred tax assets 85,600
Valuation allowance (85,600)
- - --------------------------------------------------------------------------------
Net deferred taxes --
- - --------------------------------------------------------------------------------
F-38
<PAGE>
PRO FORMA CONSOLIDATED STATEMENT OF
OPERATIONS (UNAUDITED)
FORTUNE ENTERTAINMENT
CORPORATION
December 31, 1997
F-39
<PAGE>
Fortune Entertainment Corporation
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
Year ended December 31, 1997
<TABLE>
<CAPTION>
FORTUNE
FORTUNE ENTERTAINMENT
ENTERTAINMENT CORPORATION PRO FORMA
CORPORATION (BAHAMAS) CONSOLIDATED
$ $ $
- - ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
EXPENSES
Advertising -- 1,941 1,941
Amortization of intangible assets [note 2] 13,278 -- 13,278
Bank charges and interest -- 12,363 12,363
Depreciation -- 11,618 11,618
Foreign exchange loss -- 4,681 4,681
Management fees 126,050 228,950 355,000
Office and miscellaneous -- 100,869 100,869
Professional fees 15,000 142,648 157,648
Rent -- 37,337 37,337
Salaries and wages -- 113,560 113,560
Travel, promotion and entertainment 66,298 106,873 173,171
- - ---------------------------------------------------------------------------------------------
Total expenses 220,626 760,840 981,466
- - ---------------------------------------------------------------------------------------------
Loss before the following: (220,626) (760,840) (981,466)
Investment valuation reserve -- (1,034,013) (1,034,013)
- - ---------------------------------------------------------------------------------------------
Loss for the year (220,626) (1,794,853) (2,015,479)
- - ---------------------------------------------------------------------------------------------
Basic and diluted loss per share [note 3] -- -- (1.75)
- - ---------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
F-40
<PAGE>
Fortune Entertainment Corporation (Bahamas)
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
Year ended December 31, 1997
1. BACKGROUND
Fortune Entertainment Corporation was incorporated on August 25, 1997 in
Delaware and is committed to developing gaming and entertainment products for
both the North American and International markets.
The historical financial data presented in these pro forma consolidated
financial statements represent the results of operations of the Company as if it
had been incorporated on January 1, 1997 and had acquired Fortune Entertainment
Corporation (Bahamas) on that date. Such data is derived from the respective
financial statements of these two companies which are included elsewhere in this
Form 10-SB.
Readers are cautioned that these pro forma financial statements are not
necessarily representative of future results.
F-41
<PAGE>
Fortune Entertainment Corporation
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
Year ended December 31, 1997
2. ACQUISITION OF FORTUNE ENTERTAINMENT CORPORATION (BAHAMAS)
On October 14, 1997 the Company acquired all of the issued and outstanding share
stock from shareholders of Fortune Entertainment Corporation (Bahamas), for the
following consideration:
<TABLE>
<CAPTION>
# of Shares $
- - --------------------------------------------------------------------------------------------------
Purchase price 1,542,657
- - --------------------------------------------------------------------------------------------------
<S> <C> <C>
Consideration given:
Common Stock 1,090,464 385,665
Series A Preferred Stock 1,090,464 385,664
Series B Preferred Stock 1,090,464 385,664
Series C Preferred Stock 1,090,464 385,664
- - --------------------------------------------------------------------------------------------------
1,542,657
- - --------------------------------------------------------------------------------------------------
The purchase price has been allocated according to the estimated fair values of
the assets and liabilities of Fortune Entertainment Corporation (Bahamas) as
follows:
$
- - --------------------------------------------------------------------------------------------------
Cash 26,150
Accounts receivable 17,268
Prepaid expenses 10,123
Property and equipment 66,100
Investment in Advanced Gaming Technology, Inc. 990,000
PVA Electronic Tournament Poker 321,986
Accounts payable (23,480)
Loan payable (250,000)
Due to related parties (228,950)
Goodwill on acquisition 613,460
- - --------------------------------------------------------------------------------------------------
1,542,657
- - --------------------------------------------------------------------------------------------------
</TABLE>
Goodwill is being amortized on a straight-line basis over ten years and 1997
amortization expense is $13,278.
F-42
<PAGE>
Fortune Entertainment Corporation
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
Year ended December 31, 1997
3. PRO FORMA BASIC AND DILUTED LOSS PER SHARE
The pro forma basic and diluted loss per share for the year ended December 31,
1997 is based on the following:
1997
$
- - --------------------------------------------------------------------------------
Net loss for the year (2,015,479)
Weighted average number of common shares used
in computation 1,152,484
Basic and diluted loss per share (1.75)
- - --------------------------------------------------------------------------------
The diluted loss per share is equivalent to the basic loss per share because
convertible stock is considered anti-dilutive.
F-43
<PAGE>
EXHIBIT INDEX
Item 1. Index to Exhibits.
The Exhibit Index specifying the sequential page number of
each Exhibit filed herewith appears immediately after the
financial statements.
Item 2. Description of Exhibits.
2.1 Articles of Incorporation of Registrant
2.2 By-Laws of the Registrant
3.1 Certificate of Designation, Preferences and Rights of the
Series A Preferred Stock
3.2 Certificate of Designation, Preferences and Rights of the
Series B Preferred Stock
3.3 Certificate of Designation, Preferences and Rights of the
Series C Preferred Stock
5.1 Purchase & Sale Agreement between the Company and Video
Lottery Consultants, Inc. for Professional Video Associates,
Inc. dated September 5, 1997, as amended.
5.2 Letter Agreement between Team Rainbow Inc. and the Company
dated November 19, 1997, as amended.
5.3 Assignment of Software Release Agreement between William M.
Danton & Fortune Entertainment Corporation (Bahamas).
5.4 Assignment of Manufacturing Agreement dated July 14, 1998
between Video Lottery Consultants, Inc. & Fortune
Entertainment Corporation (Bahamas).
<PAGE>
CERTIFICATE OF INCORPORATION
OF
FORTUNE ENTERTAINMENT CORPORATION
The undersigned natural, adult person, acting as incorporator of a
corporation (hereinafter usually referred to as the "Corporation") pursuant to
the provisions of the Delaware Corporation Law, hereby adopts the following
Certificate of Incorporation for said Corporation:
ARTICLE I
Name
The name of the Corporation shall be Fortune Entertainment Corporation.
ARTICLE II
Duration
The period of duration of the Corporation shall be perpetual.
ARTICLE III
Purpose
The purpose for which the Corporation is organized is to transact any
or all lawful business for which corporations may be incorporated pursuant to
the Delaware Corporation Law.
ARTICLE IV
Capital Stock
The authorized capital stock of the Corporation shall consist of
30,000,000 shares of common stock, $0.0001 par value, and 5,000,000 shares of
preferred stock, $0.0001 par value.
ARTICLE V
Preferences, Limitations
and Relative Rights of
Capital Stock
No share of the common stock shall have any preference over or
limitation in respect to any other share of such common stock. All shares of
common stock shall have equal rights and privileges, including the following:
1. All shares of common stock shall share equally in dividends.
Subject to the applicable provisions of the laws of this
State, the Board of Directors of the Corporation may, from
time to time, declare and the Corporation may pay dividends in
cash, property, or its own shares, except when the Corporation
is insolvent or when the payment thereof would render the
Corporation
<PAGE>
insolvent or when the declaration or payment thereof would be
contrary to any restrictions contained in this Certificate of
Incorporation. When any dividend is paid or any other
distribution is made, in whole or in part, from sources other
than unreserved and unrestricted earned surplus such dividend
or distribution shall be identified as such, and the source
and amount per share paid from each source shall be disclosed
to the stockholder receiving the same concurrently with the
distribution thereof and to all other stockholders not later
than six months after the end of the Corporation's fiscal year
during which such distribution was made.
2. All shares of common stock shall share equally in
distributions in partial liquidation. Subject to the
applicable provisions of the laws of this State the Board of
Directors of the Corporation may distribute, from time to
time, to its stockholders in partial liquidation, out of
stated capital or capital surplus of the Corporation, a
portion of its assets in cash or property, except when the
Corporation is insolvent or when such distribution would
render the Corporation insolvent. Each such distribution, when
made shall be identified as a distribution in partial
liquidation, out of stated capital or capital surplus and the
source and amount per share paid from each source shall be
disclosed to all stockholders of the Corporation concurrently
with the distribution thereof. Any such distribution may be
made by the Board of Directors from stated capital without the
affirmative vote of any stockholders of the Corporation.
3. Each outstanding share of common stock shall be entitled to
one vote at stockholders' meetings, either in person or by
proxy.
(b) The designations, powers, rights, preferences,
qualifications, restrictions and limitations of the preferred stock shall be
established from time to time by the Corporation's Board of Directors, in
accordance with the Delaware Corporation Law.
(c) 1. Cumulative voting shall not be allowed in elections of
directors or for any purpose.
2. No holders of shares of capital stock of the
Corporation shall be entitled, as such, to any preemptive or preferential right
to subscribe to any unissued stock or any other securities which the Corporation
may now or hereafter be authorized to issue. The Board of Directors of the
Corporation, however, in its discretion by resolution, may determine that any
-2-
<PAGE>
unissued securities of the Corporation shall be offered for subscription solely
to the holders of common stock of the Corporation, or solely to the holders of
any class or classes of such stock, which the Corporation may now or hereafter
be authorized to issue, in such proportions based on stock ownership as said
board in its discretion may determine.
3. The Board of Directors may restrict the transfer of any
of the Corporation's stock issued by giving the Corporation or any stockholder
"first right of refusal to purchase" the stock, by making the stock redeemable,
or by restricting the transfer of the stock under such terms and in such manner
as the directors may deem necessary and as are not inconsistent with the laws of
this State. Any stock so restricted must carry a conspicuous legend noting the
restriction and the place where such restriction may be found in the records of
the Corporation.
4. The judgment of the Board of Directors as to the
adequacy of any consideration received or to be received for any shares,
options, or any other securities which the Corporation at any time may be
authorized to issue or sell or otherwise dispose of shall be conclusive in the
absence of fraud, subject to the provisions of these Articles of Incorporation
and any applicable law.
ARTICLE VI
Registered Agent
The name and address of the Corporation's initial registered agent
shall be:
The Company Corporation
1313 North Market Street
New Castle County
Wilmington, Delaware 19801-1151
The Board of Directors, however, from time to time may establish such
other offices, branches, subsidiaries, or divisions which it may consider to be
advisable.
ARTICLE VII
Directors
The affairs of the Corporation shall be governed by a board of not less
than one (1) director, who shall be elected in accordance with the Bylaws of the
Corporation. Subject to such limitation, the number of directors shall be fixed
by or in the manner provided in the Bylaws of the Corporation, as may be amended
from time to time. The organization and conduct of the board shall be in
accordance with the following:
-3-
<PAGE>
1. The name and address of the initial Director who shall hold
office until the first annual meeting of the stockholders of
the Corporation or until his successor shall have been elected
and qualified, is:
Name Address
---- -------
Bruce Horton 543 Granville St., Suite 303
Vancouver, British Columbia,
Canada V6C-lX8
2. The directors of the Corporation need not be residents of
Delaware and shall not be required to hold shares of the
Corporation's capital stock.
3. Meetings of the Board of Directors, regular or special,
may be held within or without Delaware upon such notice
as may be prescribed by the Bylaws of the Corporation.
Attendance of a director at a meeting shall constitute
a waiver by him of notice of such meeting unless he
attends only for the express purpose of objecting to
the transaction of any business thereat on the ground
that the meeting is not lawfully called or convened.
4. A majority of the number of directors at any time constituting
the Board of Directors shall constitute a quorum for the
transaction of business.
5. By resolution adopted by a majority of the Directors at
any time constituting the Board of Directors, the Board
of Directors may designate two or more directors to
constitute an Executive Committee or one or more other
committees each of which shall have and may exercise.
to the extent permitted by law or in such resolution,
all the authority of the Board of Directors in the
management of the Corporation; but the designation of
any such committee and the delegation of authority
thereto shall not operate to relieve the Board of
Directors, or any member thereof, of any responsibility
imposed on it or him by law.
6. Any vacancy in the Board of Directors, however caused or
created, may be filled by the affirmative vote of a majority
of the remaining directors, though less than a quorum of the
Board of Directors. A director elected to fill a vacancy shall
be elected for the unexpired term of his predecessor in office
and until his successor is duly elected and qualified.
-4-
<PAGE>
ARTICLE VIII
Officers
The officers of the Corporation shall be prescribed by the Bylaws of
this Corporation.
ARTICLE IX
Meetings of Shareholders
Meetings of the stockholders of the Corporation shall be held at such
place within or without Delaware and at such times as may be prescribed in the
Bylaws of the Corporation. Special meetings of the stockholders of the
Corporation may be called by the President of the Corporation, the Board of
Directors, or by the record holder or holders of at least ten percent (10%) of
all shares entitled to vote at the meeting. At any meeting of the stockholders,
except to the extent otherwise provided by law, a quorum shall consist of a
majority of the shares entitled to vote at the meeting; and, if a quorum is
present, the affirmative vote of the majority of shares represented at the
meeting and entitled to vote thereat shall be the act of the stockholders unless
the vote of a greater number is required by law.
ARTICLE X
Voting
When, with respect to any action to be taken by stockholders of this
Corporation, the laws of Delaware requires the affirmative vote of the holders
of more than a majority of the outstanding shares entitled to vote thereon, or
of any class or series, such action may be taken by the affirmative vote of the
holders of a majority of the outstanding shares entitled to vote on such action.
ARTICLE XI
Bylaws
The initial Bylaws of the Corporation shall be adopted by its Board of
Directors. Subject to repeal or change by action of the stockholders, the power
to alter, amend, or repeal the Bylaws or to adopt new Bylaws shall be vested in
the Board of Directors.
ARTICLE XII
Transactions with Directors and
Other Interested Parties
No contract or other transaction between the Corporation and any other
corporation, whether or not a majority of the shares of the capital stock of
such other corporation is owned by the Corporation, and no act of the
Corporation shall in any way be affected or invalidated by the fact that any of
the directors of the Corporation are pecuniarily or otherwise interested in, or
-5-
<PAGE>
are directors or officers of, such other corporation. Any director of the
corporation, individually, or any firm with which such director is affiliated
may be a party to or may be pecuniarily or otherwise interested in any contract
or transaction of the Corporation; provided, however, that the fact that he or
such firm is so interested shall be disclosed or shall have been known to the
Board of Directors of the Corporation, or a majority thereof, at or before the
entering into such contract or transaction; and any director of the Corporation
who is also a director or officer of such other corporation, or who is so
interested, may be counted in determining the existence of a quorum at any
meeting of the Board of Directors of the Corporation which shall authorize such
contract or transaction, with like force and effect as if he were not such
director or officer of such other corporation or not so interested.
ARTICLE XIII
Limitation of Director Liability
and Indemnification
No director of the Corporation shall have liability to the Corporation
or to its stockholders, or to other security holders for monetary damages for
breach of fiduciary duty as a director; provided, however, that such provisions
shall not eliminate or limit the liability of a director to the Corporation or
to its shareholders or other security holders for monetary damages for: (i) any
breach of the director's duty of loyalty to the Corporation or to its
shareholders or other security holders; (ii) acts or omissions of the director
not in good faith or which involve intentional misconduct or a knowing violation
of the law by such director; (iii) acts by such director as specified by the
Delaware Corporation Law; or (iv) any transaction from which such director
derived an improper personal benefit.
No officer or director shall be personally liable for any injury to
person or property arising out of a tort committed by an employee of the
Corporation unless such officer or director was personally involved in the
situation giving rise to the injury or unless such officer or director committed
a criminal offense. The protection afforded in the preceding sentence shall not
restrict other common law protections and rights that an officer or director may
have.
The word director shall include at least the following unless limited
by Delaware law: an individual who is or was a director of the Corporation and
an individual who, while a director of a Corporation is or was serving at the
Corporation's request as a director, officer, partner, trustee, employee or
agent of any other foreign or domestic corporation or of any partnership, joint
venture, trust, other enterprise or employee benefit plan. A director shall be
considered to be serving an employee benefit plan at the Corporation's request
if his duties
-6-
<PAGE>
to the Corporation also impose duties on or otherwise involve services by him to
the plan or to participants in or beneficiaries of the plan. To the extent
allowed by Delaware law. the word "director" shall also include the heirs and
personal representatives of all directors.
This Corporation shall be empowered to indemnify its officers and
directors to the fullest extent provided by law, including but not limited to
the provisions set forth in the Delaware Corporation Law, or any successor
provision.
ARTICLE XIII
Incorporator
The name and address of the incorporator of the Corporation is as
follows:
Name Address
---- -------
William T. Hart 1624 Washington Street
Denver, CO 80203
IN WITNESS WHEREOF, the undersigned incorporator has hereunto affixed
his signature on the 20th day of August 1997.
_____________________________
William T. Hart
-7-
<PAGE>
BY-LAWS
OF
FORTUNE ENTERTAINMENT CORPORATION
1. MEETINGS OF STOCKHOLDERS
1.1 Annual Meeting. An annual meeting of stockholders shall be held for the
election of directors at such date, time and place, either within or without the
State of Delaware, as may be designated by resolution of the Board of Directors
(the "Board") from time to time. Any other proper business may be transacted at
the annual meeting.
1.2 Special Meetings. Special meetings of the stockholders may be called at
any time by resolution of the Board or by the Chairman of the Board, the Chief
Executive Officer or the President, and may be held either within or without the
State of Delaware, but such special meetings may not be called by any other
persons.
1.3 Notice of Meetings. Written notice of each meeting of stockholders
shall be given to each stockholder entitled to vote at the meeting, personally
or by mail, not less than 10 nor more than 60 days before the meeting and shall
state the time and place of the meeting, and unless it is the annual meeting,
shall state the purposes for which it is called. If mailed, notice shall be
considered given when mailed to a stockholder at his address on the
Corporation's records.
1.4 Adjournments. Any meeting of stockholders, annual or special, may
adjourn from time to time to reconvene at the same or some other place, and
notice need not be given of any such adjourned meeting if the time and place
thereof are announced at the meeting at which the adjournment is taken. At the
adjourned meeting the Corporation may transact any business which might have
been transacted at the original meeting. If the adjournment is for more than 30
days, or if after the adjournment a new record date is fixed for the adjourned
meeting, a notice of the adjourned meeting shall be given to each stockholder of
record entitled to vote at the meeting.
1.5 Quorum. Except as provided by law, the Certificate of Incorporation or
these By-laws, at each meeting of stockholders, the presence in person or by
proxy of the holders of a majority of the issued and outstanding shares of stock
entitled to vote shall constitute a quorum for the transaction of any business.
In the absence of a quorum, holders of a majority of the shares of stock
entitled to vote present in person or by proxy, or, if no stockholders are
present, any officer entitled to preside at or to act as secretary of the
<PAGE>
meeting, may adjourn the meeting from time to time in the manner provided in
Section 1.4 of these By-laws until a quorum is present.
1.6 Organization. Meetings of stockholders shall be presided over by the
Chairman of the Board, or in his absence, the Vice Chairman of the Board, or in
his absence, by the Chief Executive Officer, or in his absence, by the
President, or in the absence of the foregoing persons by a chairman designated
by the Board of Directors, or in the absence of such designation by a chairman
chosen at the meeting. The Secretary shall act as secretary of the meeting, but
in his absence the chairman of the meeting may appoint any person to act as
secretary of the meeting.
1.7 Voting; Proxies. Each stockholder of record entitled to vote at any
meeting of stockholders shall be entitled to one vote for every share registered
in his name, except as otherwise provided in the Certificate of Incorporation or
any certificate of designation authorizing the creation of any series or class
of stock of the Corporation filed with the Secretary of State pursuant to
Section 151 of the Delaware General Corporation Law. Corporate action to be
taken by stockholder vote, other than the election of directors, shall be
authorized by a majority of the votes cast at a meeting of stockholders, except
as otherwise provided by law, Section 1.10 of these By-laws, or in the
Certificate of Incorporation or any certificate of designation authorizing the
creation of any series or class of stock of the Corporation filed with the
Secretary of State pursuant to Section 151 of the Delaware General Corporation
Law. Directors shall be elected in the manner provided in Section 2.1 of these
By-laws. Unless required by statute or the Certificate of Incorporation, or
ordered by the chairman of the meeting, voting need not be by written ballot.
Each stockholder entitled to vote at any meeting of stockholders or express
consent to or dissent from corporate action in writing without a meeting may
authorize another person to act for him by proxy. Every proxy must be signed by
the stockholder or his attorney-in-fact. No proxy shall be valid after three
years from its date unless it provides otherwise. A duly executed proxy shall be
irrevocable if it states that it is irrevocable and if, and only as long as, it
is coupled with an interest sufficient in law to support an irrevocable power. A
stockholder may revoke any proxy which is not irrevocable by attending the
meeting and voting in person or by filing an instrument in writing revoking the
proxy or another duly executed proxy bearing a later date with the Secretary of
the Corporation.
1.8 Fixing Date for Determination of Stockholders of Record. In order that
the Corporation may determine the
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stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board may fix a record date, which record date shall
not precede the date upon which the resolution fixing the record date is adopted
by the Board and which record date: (1) in the case of determination of
stockholders entitled to vote at any meeting of stockholders or adjournment
thereof, shall, unless otherwise required by law, not be more than 60 nor less
than 10 days before the date of such meeting; (2) in the case of determination
of stockholders entitled to express consent to corporate action in writing
without a meeting, shall not be more than 10 days from the date upon which the
resolution fixing the record date is adopted by the Board; and (3) in the case
of any other action, shall not be more than 60 days prior to such other action.
If no record date is fixed, (1) the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next preceding the day on which notice is given, or
if notice is waived, at the close of business on the day next preceding the day
on which the meeting is held; (2) the record date for determining stockholders
entitled to express consent to corporate action in writing without a meeting
when no prior action of the Board is required by law shall be the first date on
which a signed written consent setting forth the action taken or proposed to be
taken is delivered to the corporation in accordance with applicable law, or, if
prior action by the Board is required by law, shall be at the close of business
on the day on which the Board adopts the resolution taking such prior action;
and (3) the record date for determining stockholders for any other purpose shall
be at the close of business on the day on which the Board adopts the resolution
relating thereto. A determination of stockholders of record entitled to notice
of or to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board may fix a new record date for the
adjourned meeting.
1.9 List of Stockholders. Not less than 10 days prior to the date of any
meeting of stockholders, the Secretary of the corporation shall prepare a
complete list of stockholders entitled to vote at the meeting, arranged in
alphabetical order and showing the address of each stockholder and the number of
shares registered in his name. For a period of not less than 10 days prior to
the meeting, the list shall be available during ordinary business hours for
inspection by any stockholder for any purpose germane to the meeting. During
this period, the list shall be kept either (a) at a place within the city where
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<PAGE>
the meeting is to be held, if that place shall have been specified in the notice
of meeting, or (b) if not so specified, at the place where the meeting is to be
held. The list also shall be available for inspection by stockholders at the
time and place of the meeting.
1.10 Action by Consent without a Meeting. Unless otherwise provided in the
Certificate of Incorporation, any action required or permitted to be taken at
any annual or special meeting of stockholders of the Corporation may be taken
without a meeting, without prior notice and without a vote, if a consent in
writing, setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voting. Prompt notice of the taking of
any such action shall be given to those stockholders who did not consent in
writing.
1.11 Inspectors. The Board may, in advance of any meeting of stockholders,
appoint one or more inspectors to act at such meeting or any adjournment
thereof. If the inspectors shall not be so appointed or if any of them shall
fail to appear or act, the chairman of the meeting may, and at the request of
any stockholder entitled to vote thereat shall, appoint inspectors. Each
inspector, before entering upon the discharge of his duties, shall take and sign
an oath faithfully to execute the duties of inspector at such meeting with
strict impartiality and according to the best of his ability. The inspectors
shall determine the number of shares outstanding and the voting power of each,
the number of shares represented at the meeting, the existence of a quorum, the
validity and effect of proxies, and shall receive votes, ballots or consents,
hear and determine all challenges and questions arising in connection with the
right to vote, count and tabulate all votes, ballots or consents, determine the
result, and do such acts as are proper to conduct the election or vote with
fairness to all stockholders. On request of the chairman of the meeting or any
stockholder entitled to vote thereat, the inspectors shall make a report in
writing of any challenge, request or matter determined by them and shall execute
a certificate of any fact found by them. Inspectors may, but need not, be
stockholders.
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2. BOARD OF DIRECTORS
2.1 Number, Qualification, Election and Term of Directors. The business of
the Corporation shall be managed by the Board of Directors. The Board of
Directors shall consist of not more than seven nor less than three directors, as
fixed from time to time by resolution of the Board, except that the number of
directors constituting the Board may be less than three provided the number of
directors is not less than the number of stockholders. The number of directors
may be changed by a resolution of a majority of the directors then in office or
by the stockholders, but no decrease may shorten the term of any incumbent
director. Directors shall be elected at each annual meeting of stockholders by a
plurality of the votes cast and shall hold office until the election and
qualification of their respective successors, or if earlier, their death,
resignation or removal in accordance with the provisions of Section 2.9 of these
By-laws, or as otherwise provided by law or the Certificate of Incorporation.
2.2 Quorum and Manner of Acting. A majority of the directors then in office
shall constitute a quorum for the transaction of business at any meeting, except
as provided in Section 2.7 of these By-laws. In the absence of a quorum, a
majority of the directors present may adjourn any meeting from time to time
until a quorum is present. Action of the Board shall be authorized by the vote
of a majority of the directors present at the time of the vote if there is a
quorum, unless otherwise provided by law, these By-laws or the Certificate of
Incorporation.
2.3 Annual and Regular Meetings. Annual meetings of the Board for the
election of officers and consideration of other matters may be held either
within or without the State of Delaware and shall be held either (a) without
notice immediately after the annual meeting of stockholders and at the same
place, or (b) as soon as practicable after the annual meeting of stockholders,
on notice as provided in Section 2.5 of these By-laws. Regular meetings of the
Board may be held without notice at such times and places as the Board
determines. If the day fixed for the regular meeting is a legal holiday, the
meeting shall be held on the next business day.
2.4 Special Meetings. Special meetings of the Board may be held at any time
and place within or without the State of Delaware whenever called by the
Chairman of the Board, the Vice Chairman of the Board, the Chief Executive
Officer, the President or by a majority of the directors. Only business related
to the purposes set forth in the notice of meeting may be transacted at a
special meeting.
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2.5 Notice of Meetings. Notice of the time and place of each special
meeting of the Board, and of each annual meeting not held immediately after the
annual meeting of stockholders and at the same place, shall be given to each
director by mailing it to him at his residence or usual place of business at
least three days before the meeting, or by delivering, telephoning or faxing it
to him at least 24 hours before the meeting. Notice of a special meeting shall
also state the purpose or purposes for which the meeting is called. Notice of
any adjourned meeting need not be given, other than by announcement at the
meeting at which the adjournment is taken.
2.6 Organization. Meetings of the Board of Directors shall be presided over
by the Chairman of the Board, or in his absence, the Vice Chairman of the Board,
or in his absence, the Chief Executive Officer, or in his absence, the
President, or in their absence by a chairman chosen at the meeting. The
Secretary shall act as secretary of the meeting, but in his absence the chairman
of the meeting may appoint any person to act as secretary of the meeting.
2.7 Board or Committee Action without a Meeting. Any action required or
permitted to be taken by the Board or by any committee of the Board may be taken
without a meeting if all of the members of the Board or the committee consent in
writing to the adoption of a resolution authorizing the action. The resolution
and the written consents by the members of the Board or the committee shall be
filed with the minutes of the proceedings of the Board or of the committee.
2.8 Participation in Board or Committee Meetings by Conference Telephone.
Any or all members of the Board or of any committee of the Board may participate
in a meeting of the Board or of the committee by means of a conference telephone
or similar communications equipment allowing all persons participating in the
meeting to hear each other at the same time. Participation by such means shall
constitute presence in person at the meeting.
2.9 Resignation and Removal of Directors. Any director may resign at any
time by delivering his resignation in writing to the Chairman of the Board, the
Vice Chairman of the Board, the Chief Executive Officer, the President or the
Secretary of the Corporation, to take effect at the time specified in the
resignation, and the acceptance of a resignation, unless required by its terms,
shall not be necessary to make it effective. Except as otherwise provided by law
or in the Certificate of Incorporation, any or all of the directors may be
removed at any time, either with or without cause, by vote of a majority of the
shares then entitled to vote for the election of directors.
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2.10 Vacancies. Any vacancy in the Board, including one created by an
increase in the number of directors, may be filled by a majority vote of the
remaining directors, although such majority is less than a quorum, or by a
plurality of the votes cast at a meeting of the stockholders, and each director
so elected shall hold office until the expiration of the term of the director
whom he has replaced or until his successor is elected and qualified.
2.11 Compensation. Directors shall receive such compensation as the Board
determines, together with reimbursement of their reasonable expenses in
connection with the performance of their duties. A director also may be paid for
serving the Corporation, its affiliates or subsidiaries in other capacities.
3. COMMITTEES
3.1 Executive Committee. The Board, by resolution adopted by a majority of
the entire Board, may designate an Executive Committee of one or more directors
which shall have all the powers and authority of the Board, except as otherwise
provided in the resolution, Section 141(c) of the Delaware General Corporation
Law, or any other applicable law. The members of the Executive Committee shall
serve at the pleasure of the Board. All action of the Executive Committee shall
be reported to the Board at its next meeting.
3.2 Other Committees. The Board, by resolution adopted by a majority of the
entire Board, may designate other committees of the Board of one or more
directors, which shall serve at the Board's pleasure and have such powers and
duties as the Board determines, subject to the limitations set forth in Section
141(c) of the Delaware General Corporation Law.
3.3 Rules Applicable to Committees. The Board may designate one or more
directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. In the absence or
disqualification of any member of a committee, the member or members present at
a meeting of the committee and not disqualified, whether or not a quorum, may
unanimously appoint another director to act at the meeting in place of the
absent or disqualified member. All action of the committee shall be reported to
the Board at its next meeting. Each committee shall adopt rules of procedure and
shall meet as provided by those rules or by resolutions of the Board.
4. OFFICERS
4.1 Executive Officers. The executive officers of the Corporation shall
consist of the Chairman of the Board, the
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Chief Executive Officer, the President, one or more Vice Presidents (one or more
of whom may be designated Executive Vice President or Senior Vice President),
the Chief Financial Officer, a Secretary and a Treasurer. Any two or more
offices may be held by the same person.
4.2 Election; Term of Office. The executive officers of the Corporation
shall be elected annually by the Board, and each such officer shall hold office
until the next annual meeting of the Board and until the election of his
successor, or his earlier death, resignation or removal in accordance with the
provisions of Section 4.4 of these By-laws.
4.3 Subordinate Officers. The Board may appoint subordinate officers
(including assistant secretaries and assistant treasurers), agents or employees,
each of whom shall hold office for such period and have such powers and duties
as the Board determines. The Board may delegate to any executive officer or to
any committee the power to appoint and define the powers and duties of any
subordinate officers, agents or employees. The Board may require any officer,
agent or employee to give security for the faithful performance of his duties.
4.4 Resignation and Removal of Officers. Any officer may resign at any time
by delivering his resignation in writing to the Chairman of the Board, the Vice
Chairman of the Board, the Chief Executive Officer, the President or the
Secretary of the Corporation, to take effect at the time specified in the
resignation, and the acceptance of such resignation, unless required by its
terms, shall not be necessary to make it effective. Any officer appointed by the
Board or appointed by an executive officer or by a committee may be removed by
the Board either with or without cause, and in the case of an officer appointed
by an executive officer or by a committee, by the officer or committee who
appointed him or by the Chairman of the Board, the Vice Chairman of the Board,
the Chief Executive Officer or the President.
4.5 Vacancies. A vacancy in any office may be filled for the unexpired term
in the manner prescribed in Sections 4.2 and 4.3 of these By-laws for election
or appointment to the office.
4.6 Chairman of the Board. The Chairman of the Board of the Corporation
shall preside at all meetings of the Board and of the stockholders and shall
have such other powers and duties as the Board assigns to him.
4.7 Chief Executive Officer. The Chief Executive Officer of the Corporation
shall supervise and direct the business and affairs of the Corporation, subject
to the control of the Board,
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<PAGE>
and shall have such other powers and duties as the Board assigns to him.
4.8 President. The President of the Corporation shall, subject to the
direction of the Chief Executive Officer and the control of the Board, direct
and manage the day-to-day business activities and general affairs of the
Corporation, and shall have such other powers and duties as the Board assigns to
him.
4.9 Vice-President. Each vice president shall have such powers and duties
as the Board or the Chairman of the Board, the Chief Executive Officer or the
President assigns to him.
4.10 Secretary. The Secretary shall be the secretary of, and keep the
minutes of, all meetings of the Board and of the stockholders, shall be
responsible for giving notice of all meetings of stockholders and of the Board,
and shall keep the seal and, when authorized by the Board, apply it to any
instrument requiring it. Subject to the control of the Board, he shall have such
powers and duties as the Board, the Chairman of the Board or the President
assigns to him. In the absence of the Secretary from any meeting, the minutes
shall be kept by the person appointed for that purpose by the presiding officer.
4.11 Chief Financial Officer. The Chief Financial Officer of the
Corporation shall be the principal financial and accounting officer of the
Corporation, and shall have primary responsibility for the Corporation's books
and accounts. Subject to the control of the Board, he shall have such other
powers and duties as the Board, the Chairman of the Board, the Chief Executive
Officer or the President assigns to him.
4.12 Treasurer. The Treasurer of the Corporation shall have custody of the
corporate funds and securities and, subject to the control of the Board, shall
have such other powers and duties as the Board, the Chairman of the Board, the
Chief Executive Officer, the President or the Chief Financial Officer assigns to
him.
4.13 Salaries. The Board may fix the officers' salaries, if any, or it may
authorize the Chairman of the Board or the President to fix the salary of any
other officer.
5. SHARES
5.1 Certificates. The Corporation's shares shall be represented by
certificates in the form approved by the Board. Each certificate shall be signed
by the Chairman of the Board, the Vice Chairman of the Board, the Chief
Executive Officer, the
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<PAGE>
President or a Vice President and by the Secretary or an Assistant Secretary, or
the Treasurer or an Assistant Secretary, and shall be sealed with the
Corporation's seal or a facsimile of the seal. Any or all of the signatures on
the certificate may be a facsimile.
5.2 Transfers. Shares shall be transferable only on the Corporation's
books, upon surrender of the certificate for the shares, properly endorsed.
5.3 Lost, Stolen or Destroyed Certificates. The Corporation may issue a new
certificate of stock in the place of any certificate theretofore issued by it,
alleged to have been lost, stolen or destroyed, and the Corporation may require
the owner of any lost, stolen or destroyed certificate, or his legal
representative, to give the Corporation a bond sufficient to indemnify it
against any claim that may be made against it on account of the alleged loss,
theft or destruction of any such certificate or the issuance of any new
certificate.
6. MISCELLANEOUS
6.1 Seal. The corporate seal shall bear the Corporation's name and the year
and state in which it was incorporated.
6.2 Fiscal Year. The Board, by resolution, may determine the Corporation's
fiscal year. Until changed by the Board, the Corporation's fiscal year shall be
the calendar year.
6.3 Waiver of Notice of Meetings of Stockholders, Directors and Committees.
Any written waiver of notice, signed by the person entitled to notice, whether
before or after the time stated therein, shall be deemed equivalent to notice.
Attendance of a person at the meeting shall constitute a waiver of notice of
such meeting, except when the person attends a meeting for the express purpose
of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business transacted at, nor the purpose of, any regular or special meeting of
the stockholders, directors, or members of a committee of directors need be
specified in any written waiver of notice.
6.4 Interested Directors; Ouorum. No contract or transaction between the
Corporation and one or more of its directors or officers, or between the
Corporation and any other corporation, partnership or association, or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the
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Board or committee thereof which authorizes the contract or transaction, or
solely because his or their votes are counted for such purpose, if: (1) the
material facts as to his relationship or interest and as to the contract or
transaction are disclosed or are known to the Board or the committee, and the
Board or the committee in good faith authorizes the contract or transaction by
the affirmative votes of a majority of the disinterested directors, even though
the disinterested directors be less than a quorum; or (2) the material facts as
to his relationship or interest and as to the contract or transaction are
disclosed or are known to the stockholders entitled to vote thereon, and the
contract or transaction is specifically approved in good faith by vote of the
stockholders; or (3) the contract or transaction is fair as to the Corporation
as of the time it is authorized, approve or ratified by the Board, a committee
thereof, or the stockholders. Common or interested directors may be counted in
determining the presence of a quorum at a meeting of the Board or of a committee
which authorizes the contract or the transaction.
6.5 Voting of Shares in other Corporations. Shares in other corporations
which are held by the Corporation may be represented and voted by the Chairman
of the Board, the Chief Executive Officer, the President or a Vice President of
the Corporation or by proxy or proxies appointed by any one of them. The Board
may, however, appoint some other person to vote the shares.
6.6 Amendments. These By-laws may be amended or repealed, and new By-laws
may be adopted, by the Board, subject to compliance with Section 2.2 of these
By-Laws, but the stockholders may adopt additional By-laws and may amend and
repeal any By-laws whether adopted by them or otherwise.
<PAGE>
CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS
OF THE SERIES A PREFERRED STOCK
OF
FORTUNE ENTERTAINMENT CORPORATION
David B. Jackson and Bruce Horton, the President and Secretary of
Fortune Entertainment Corporation, a corporation organized and existing under
the laws of Delaware, DO HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors by
the Articles of Incorporation of this corporation, the Board of Directors on
October 10, 1997, adopted the following resolution creating a series of
Preferred Shares, $0.0001 par value per share, designated as the Series A
Preferred Shares.
The relative rights and preferences of the Series A Preferred Shares
are as follows:
1. Designation and Amount. The shares of such series shall be designed
as "Series A Preferred Shares" (the "Series A Preferred Shares"), and the number
of shares constituting such series shall be 1,100,000. The number of shares
constituting such series may, unless prohibited by the Articles of
Incorporation, be decreased by resolution of the Board of Directors; provided
that no decrease shall reduce the number of Series A Preferred Shares to a
number less than the number of shares then outstanding plus the number of shares
issuable upon the exercise of outstanding options, rights or warrants or upon
the conversion of any outstanding securities issued by the Corporation
convertible in Series A Preferred Shares.
2. Dividends and Distributions
(i) The holders of Series A Preferred Shares, in preference to
the holders of Common Shares, shall be entitled to receive, when, as and if
declared by the Board of Directors out of funds legally available for the
purpose, annual dividends payable in cash on the 1st day of January in each year
(each such date being referred to herein as a "Dividend Payment Date"),
commencing on January 15, 1998 at the rate of $0.01 per share per year.
(ii) Dividends which are not declared will not accrue.
Dividends not declared will not cumulate. Accrued but unpaid dividends shall not
bear interest. Dividends paid on the Series A Preferred Shares in an amount less
than the total amount of such dividends at the time such dividends are declared
and become payable shall be allocated pro rata on a share-by-share basis among
all such shares outstanding at that time. The Board of Directors may fix a
record date for the determination of holders of Series A Preferred Shares
entitled to receive payment of a dividend or distribution declared thereon,
which record date shall be not more than thirty (30) days prior to the date
fixed for the payment thereof.
The holders of the Series A Preferred Shares shall have no special
voting rights and their consent shall not be required (except to the extent they
are entitled to vote with holders of
<PAGE>
Common Shares and any other capital Stock of the Corporation having general
voting rights as set forth herein) for taking any corporate action.
4. Certain Restrictions,
(i) Whenever dividends declared or other distributions payable
on the Series A Preferred Shares as provided in Section 2 hereof are in arrears,
thereafter and until all unpaid dividends and distributions on Series A
Preferred Shares outstanding shall have been paid in full, the Corporation shall
not:
(a) declare or pay dividends, or make any other
distributions, on any shares of stock ranking junior (either as to dividends or
upon liquidation, dissolution or winding up) to the Series A Preferred Shares;
(b) declare or pay dividends, or make any other
distributions, on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the Series A
Preferred Shares, except dividends paid ratably on the Series A Preferred Shares
and all such parity stock on which dividends are payable or in arrears in
proportion to the total amounts to which the holders of all such shares are then
entitled;
(c) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred Shares,
provided that the Corporation may at any time redeem, purchase or otherwise
acquire shares of any such junior stock in exchange for shares of stock of the
Corporation ranking junior (both as to dividends and upon liquidation,
dissolution or winding up) to the Series A Preferred Shares; or
(d) redeem or purchase or otherwise acquire for
consideration any Series A Preferred Shares, or any shares of stock ranking on a
parity with the Series A Preferred Shares, except in accordance with a purchase
offer made in writing or by publication (as deter mined by the Board of
Directors) to all holders of such shares upon such terms as the Board of
Directors, after consideration of the respective annual dividend rates and other
relative rights and preferences of the respective series and classes, shall
determine in good faith will result in fair and equitable treatment among the
respective series of classes.
(ii) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under subparagraph (i) of
this Section 4, purchase or otherwise acquire such shares at such time and in
such manner.
5. Reacquired Shares. Any Series A Preferred Shares purchased or
otherwise acquired by the Corporation in any manner whatsoever shall constitute
authorized but unissued Preferred Shares and may be reissued as part of a new
series of Preferred Shares by resolution or resolutions of the Board of
Directors, subject to the conditions and restrictions on issuance set
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forth herein, in the Articles of Incorporation, or in any other Certificate of
Designation creating a series of Preferred Shares or as otherwise required by
law.
6. Liquidation, Dissolution or Winding Up. Upon any liquidation,
dissolution or winding up of the Corporation, no distribution shall be made to
the holders of shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred Shares unless,
prior thereto, the holders of Series A Preferred Shares shall have re ceived
$0.03 per share, plus an amount equal to declared and unpaid dividends and
distributions thereon to the date of such payment.
7. Conversion.
Each share of the Series A Preferred Stock is, at the option of the
holder of the shares, convertible into one share of this Corporation's common
stock on the later of January 15, 1998 or three months after the shares of the
Corporation's common stock are listed for public trading.
In the event the Corporation shall at any time after October 10, 1997
declare or pay any dividend on Common Shares payable in Common Shares, or effect
a subdivision or combination or consolidation of the outstanding Common Shares
(by reclassification or otherwise) into a greater or lesser, number of Common
Shares, then in each such case the number of Common Shares issuable upon the
conversion of the Series A Preferred Shares immediately prior to such event
shall be adjusted by multiplying such number by a fraction, the numerator of
which is the number of Common Shares outstanding immediately after such event
and the denominator of which is the number of Common Shares that were
outstanding immediately prior to such event.
8. Consolidation, Merger. Exchange, etc. In case the Corporation shall
enter into any consolidation, merger, combination, statutory share exchange or
other transaction in which the Common Shares are exchanged for or changed into
other stock or securities, money and/or any other property, then in any such
case the Series A Preferred Shares shall at the same time be simi larly
exchanged or changed into an amount per share equal to four times the aggregate
amount of stock, securities, money and/or any other property (payable in kind),
as the case may be, into which or for which each Common Share is changed or
exchanged.
IN WITNESS WHEREOF, we have executed this Certificate of Designation,
Preferences and Rights this loth day of October, 1997.
___________________________
David B. Jackson, President
___________________________
Bruce Horton, Secretary
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CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS
OF THE SERIES B PREFERRED STOCK
OF
FORTUNE ENTERTAINMENT CORPORATION
David B. Jackson and Bruce Horton, the President and Secretary of
Fortune Entertainment Corporation, a corporation organized and existing under
the laws of Delaware, DO HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors by
the Articles of Incorporation of this corporation, the Board of Directors on
October 10, 1997, adopted the following resolution creating a series of
Preferred Shares, $0.0001 par value per share, designated as the Series B
Preferred Shares.
The relative rights and preferences of the Series B Preferred Shares
are as follows:
1. Designation and Amount. The shares of such series shall be designed
as "Series "B Preferred Shares" (the "Series B Preferred Shares"), and the
number of shares constituting such series shall be 1,100,000. The number of
shares constituting such series may, unless prohibited by the Articles of
Incorporation, be decreased by resolution of the Board of Directors; provided
that no decrease shall reduce the number of Series B Preferred Shares to a
number less than the number of shares then outstanding plus the number of shares
issuable upon the exercise of outstanding options, rights or warrants or upon
the conversion of any outstanding securities issued by the Corporation
convertible in Series B Preferred Shares.
2. Dividends and Distributions
(i) The holders of Series B Preferred Shares, in preference to the
holders of Common Shares, shall be entitled to receive, when, as and if declared
by the Board of Directors out of funds legally available for the purpose, annual
dividends payable in cash on the 1st day of January in each year (each such date
being referred to herein as a "Dividend Payment Date"), commencing on January
15, 1998 at the rate of $0.01 per share per year.
(ii) Dividends which are not declared will not accrue. Dividends not
declared will not cumulate. Accrued but unpaid dividends shall not bear
interest. Dividends paid on the Series B Preferred Shares in an amount less than
the total amount of such dividends at the time such dividends are declared and
become payable shall be allocated pro rata on a share-by-share basis among all
such shares outstanding at that time. The Board of Directors may fix a record
date for the determination of holders of Series B Preferred Shares entitled to
receive payment of a dividend or distribution declared thereon, which record
date shall be not more than thirty (30) days prior to the date fixed for the
payment thereof.
The holders of the Series B Preferred Shares shall have no special
voting rights and their consent shall not be required (except to the extent they
are entitled to vote with holders of
<PAGE>
Common Shares and any other capital stock of the Corporation having general
voting rights as set forth herein) for taking any corporate action.
4. Certain Restrictions
(i) Whenever dividends declared or other distributions payable on
the Series B Preferred Shares as provided in Section 2 hereof are in arrears,
thereafter and until all unpaid dividends and distributions on Series B
Preferred Shares outstanding shall have been paid in full, the Corporation shall
not:
(a) declare or pay dividends, or make any other distributions,
on any shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series B Preferred Shares;
(b) declare or pay dividends, or make any other distributions,
on any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series B Preferred Shares,
except dividends paid ratably on the Series B Preferred Shares and all such
parity stock on which dividends are payable or in arrears in proportion to the
total amounts to which the holders of all such shares are then entitled;
(c) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series B Preferred Shares, provided that the
Corporation may at any time redeem, purchase or otherwise acquire shares of any
such junior stock in exchange for shares of stock of the Corporation ranking
junior (both as to dividends and upon liquidation, dissolution or winding up) to
the Series B Preferred Shares; or
(d) redeem or purchase or otherwise acquire for consideration
any Series B Preferred Shares, or any shares of stock ranking on a parity with
the Series B Preferred Shares, except in accordance with a purchase offer made
in writing or by publication (as deter mined by the Board of Directors) to all
holders of such shares upon such terms as the Board of Directors, after
consideration of the respective annual dividend rates and other relative rights
and preferences of the respective series and classes, shall determine in good
faith will result in fair and equitable treatment among the respective series of
classes.
(ii) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under subparagraph (i) of
this Section 4, purchase or otherwise acquire such shares at such time and in
such manner.
5. Reacquire Shares. Any Series B Preferred Shares purchased or
otherwise acquired by the Corporation in any manner whatsoever shall constitute
authorized but unissued Preferred Shares and may be reissued as part of a new
series of Preferred Shares by resolution or resolutions of the Board of
Directors, subject to the conditions and restrictions on issuance set
-2-
<PAGE>
forth herein, in the Articles of Incorporation, or in any other Certificate of
Designation creating a series of Preferred Shares or as otherwise required by
law.
6. Liquidation, Dissolution or Winding Up. Upon any liquidation,
dissolution or winding up of the Corporation, no distribution shall be made to
the holders of shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series B Preferred Shares unless,
prior thereto, the holders of Series B Preferred Shares shall have re ceived
$0.03 per share, plus an amount equal to declared and unpaid dividends and
distributions thereon to the date of such payment.
7. Conversion.
Each share of the Series B Preferred Stock is, at the option of the
holder of the shares, convertible into one share of this Corporation's common
stock on the later of July 15, 1998 or six months after the shares of the
Corporation's common stock are listed for public trading.
In the event the Corporation shall at any time after October 10, 1997
declare or pay any dividend on Common Shares payable in Common Shares, or effect
a subdivision or combination or consolidation of the outstanding Common Shares
(by reclassification or otherwise) into a greater or lesser number of Common
Shares, then in each such case the number of Common Shares issuable upon the
conversion of the Series B Preferred Shares immediately prior to such event
shall be adjusted by multiplying such number by a fraction, the numerator of
which is the number of Common Shares outstanding immediately after such event
and the denominator of which is the number of Common Shares that were
outstanding immediately prior to such event.
8. Consolidation, Merger, Exchange, etc.. In case the Corporation shall
enter into any consolidation, merger, combination, statutory share exchange or
other transaction in which the Common Shares are exchanged for or changed into
other stock or securities, money and/or any other property, then in any such
case the Series B Preferred Shares shall at the same time be similarly exchanged
or changed into an amount per share equal to four times the aggregate amount of
stock, securities, money and/or any other property (payable in kind), as the
case may be, into which or for which each Common Share is changed or exchanged.
IN WITNESS WHEREOF, we have executed this Certificate of Designation,
Preferences and Rights this 10th day of October, 1997.
___________________________
David B. Jackson, President
___________________________
Bruce Horton, Secretary
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<PAGE>
CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS
OF THE SERIES C PREFERRED STOCK
OF
FORTUNE ENTERTAINMENT CORPORATION
David B. Jackson and Bruce Horton, the President and Secretary of
Fortune Entertainment Corporation, a corporation organized and existing under
the laws of Delaware, DO HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors by
the Articles of Incorporation of this corporation, the Board of Directors on
October 10, 1997, adopted the following resolution creating a series of
Preferred Shares, $0.0001 par value per share, designated as the Series C
Preferred Shares.
The relative rights and preferences of the Series C Preferred Shares
are as follows:
1. Designation and Amount The shares of such series shall be designed
as "Series C Preferred Shares" (the "Series C Preferred Shares"), and the number
of shares constituting such series shall be 1,100,000. The number of shares
constituting such series may, unless prohibited by the Articles of
Incorporation, be decreased by resolution of the Board of Directors; provided
that no decrease shall reduce the number of Series C Preferred Shares to a
number less than the number of shares then outstanding plus the number of shares
issuable upon the exercise of outstanding options, rights or warrants or upon
the conversion of any outstanding securities issued by the Corporation
convertible in Series C Preferred Shares.
2. Dividends and Distributions
(i) The holders of Series C Preferred Shares, in preference to
the holders of Common Shares, shall be entitled to receive, when, as and if
declared by the Board of Directors out of funds legally available for the
purpose, annual dividends payable in cash on the 1st day of January in each year
(each such date being referred to herein as a "Dividend Payment Date"),
commencing on January 15, 1998 at the rate of $0.01 per share per year.
(ii) Dividends which are not declared will not accrue.
Dividends not declared will not cumulate. Accrued but unpaid dividends shall not
bear interest. Dividends paid on the Series C Preferred Shares in an amount less
than the total amount of such dividends at the time such dividends are declared
and become payable shall be allocated pro rata on a share-by-share basis among
all such shares outstanding at that time. The Board of Directors may fix a
record date for the determination of holders of Series C Preferred Shares
entitled to receive payment of a dividend or distribution declared thereon,
which record date shall be not more than thirty (30) days prior to the date
fixed for the payment thereof.
The holders of the Series C Preferred Shares shall have no special
voting rights and their consent shall not be required (except to the extent they
are entitled to vote with holders of
<PAGE>
Common Shares and any other capital stock of the Corporation having general
voting rights as set forth herein) for taking any corporate action.
4. Certain Restrictions
(i) Whenever dividends declared or other distributions payable
on the Series C Preferred Shares as provided in Section 2 hereof are in arrears,
thereafter and until all unpaid dividends and distributions on Series C
Preferred Shares outstanding shall have been paid in full, the Corporation shall
not:
(a) declare or pay dividends, or make any other
distributions, on any shares of stock ranking junior (either as to dividends or
upon liquidation, dissolution or winding up) to the Series C Preferred Shares;
(b) declare or pay dividends, or make any other
distributions, on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the Series C
Preferred Shares, except dividends paid ratably on the Series C Preferred Shares
and all such parity stock on which dividends are payable or in arrears in
proportion to the total amounts to which the holders of all such shares are then
entitled;
(c) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series C Preferred Shares,
provided that the Corporation may at any time redeem, purchase or otherwise
acquire shares of any such junior stock in exchange for shares of stock of the
Corporation ranking junior (both as to dividends and upon liquidation,
dissolution or winding up) to the Series C Preferred Shares; or
(d) redeem or purchase or otherwise acquire for
consideration any Series C Preferred Shares, or any shares of stock ranking on a
parity with the Series C Preferred Shares, except in accordance with a purchase
offer made in writing or by publication (as deter mined by the Board of
Directors) to all holders of such shares upon such terms as the Board of
Directors, after consideration of the respective annual dividend rates and other
relative rights and preferences of the respective series and classes, shall
determine in good faith will result in fair and equitable treatment among the
respective series of classes.
(ii) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under subparagraph (i) of
this Section 4, purchase or otherwise acquire such shares at such time and in
such manner.
5. Reacquired Shares. Any Series C Preferred Shares purchased or
otherwise acquired by the Corporation in any manner whatsoever shall constitute
authorized but unissued Preferred Shares and may be reissued as part of a new
series of Preferred Shares by resolution or resolutions of the Board of
Directors, subject to the conditions and restrictions on issuance set
-2-
<PAGE>
forth herein, in the Articles of Incorporation, or in any other Certificate of
Designation creating a series of Preferred Shares or as otherwise required by
law.
6. Liquidation, Dissolution or Winding Up. Upon any liquidation,
dissolution or winding up of the Corporation, no distribution shall be made to
the holders of shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series C Preferred Shares unless,
prior thereto, the holders of Series C Preferred Shares shall have re ceived
$0.03 per share, plus an amount equal to declared and unpaid dividends and
distributions thereon to the date of such payment.
7. Conversion.
Each share of the Series C Preferred Stock is, at the option of the
holder of the shares, convertible into one share of this Corporation's common
stock on the later of October 15, 1998 or nine months after the shares of the
Corporation's common stock are listed for public trading.
In the event the Corporation shall at any time after October 10, 1997
declare or pay any dividend on Common Shares payable in Common Shares, or effect
a subdivision or combination or consolidation of the outstanding Common Shares
(by reclassification or otherwise) into a greater or lesser number of Common
Shares, then in each such case the number of Common Shares issuable upon the
conversion of the Series C Preferred Shares immediately prior to such event
shall be adjusted by multiplying such number by a fraction, the numerator of
which is the number of Common Shares outstanding immediately after such event
and the denominator of which is the number of Common Shares that were
outstanding immediately prior to such event.
8. Consolidation, Merger, Exchange, etc.. In case the Corporation shall
enter into any consolidation, merger, combination, statutory share exchange or
other transaction in which the Common Shares are exchanged for or changed into
other stock or securities, money and/or any other property, then in any such
case the Series C Preferred Shares shall at the same time be similarly exchanged
or changed into an amount per share equal to four times the aggregate amount of
stock, securities, money and/or any other property (payable in kind), as the
case may be, into which or for which each Common Share is changed or exchanged.
IN WITNESS WHEREOF, we have executed this Certificate of Designation,
Preferences and Rights this 10th day of October, 1997.
______________________________________
David B. Jackson, President
______________________________________
Bruce Horton, Secretary
-3-
<PAGE>
PURCHASE AND SALE AGREEMENT
THIS PURCHASE AND SALE AGREEMENT (this "Agreement"), dated September 5,
1997, among FORTUNE ENTERTAINMENT CORPORATION, a Bahamian corporation ("FEC"),
with a place of a business at #303-543 Granville Street, Vancouver, BC Canada
V6C 1X8, and VIDEO LOTTERY CONSULTANTS, INC., a Maine corporation ("VLC"), and
William M. Danton ("Mr. Danton"; together, the "Danton Group"), each with an
address at 144 Elm Street, 2nd Floor, Suite 16, Biddeford, Maine 04005;
W I T N E S S E T H
WHEREAS, Professional Video Associates, Inc., a Delaware corporation
("PVA"), owns, subject to certain agreements, the copyrights and patent listed
on Exhibit A (the "Intellectual Property") related to a electronic tournament
poker game known as "PVA Electronic Tournament Poker"; and
WHEREAS, PVA is in bankruptcy; and
WHEREAS, Mr. Danton intends to sponsor a plan of reorganization
(the "Plan") for PVA; and
WHEREAS, under the Plan, all of the issued and outstanding PVA stock
will be transferred to Mr. Danton; and
WHEREAS, VLC and PVA are parties to an Amended Interim Distribution
Agreement, dated September 30, 1996 (the "Interim Agreement"), pursuant to which
PVA has granted to VLC certain distribution rights with respect to California in
return for royalty payments to be made to PVA; and
WHEREAS, FEC wishes to purchase all of the PVA common stock (the "PVA
Stock") from Mr. Danton once the Plan is approved by the bankruptcy court having
jurisdiction over PVA's bankruptcy; and
WHEREAS, the Danton Group intends to transfer to FEC all of the debt
owed to the Danton Group by PVA;
NOW, THEREFORE, for One Dollar ($1.00) and other good and valuable
consideration, the sufficiency of which is hereby acknowledged, the parties
agree as follows:
ARTICLE I
DEFINITIONS
"Agreement" means this Purchase and Sale Agreement, dated September 5,
1997, among FEC, VLC and Mr. Danton.
-1-
<PAGE>
"Assets" shall have the meaning set forth in Section 3.2(q).
"Canadian Agreements" means those agreements between PVA and/or
Professional Video Associates S.A., a Panama corporation, and/or Professional
Video Association LLC, a Delaware limited liability company, on the one hand,
and P.V.A. Partnership I, a Canadian partnership, and/or Software 1993
Partnership I, a Canadian partnership, on the other hand.
"Claims" means any and all losses, claims, demands, liabilities,
obligations, actions, suits, orders, statutory or regulatory compliance
requirements, or proceedings asserted by any person or entity, and all damages,
costs, expenses, assessments, judgments, recoveries and deficiencies, including
interest, penalties, investigatory expenses, consultants' fees, and reasonable
attorneys' fees and costs (including, without limitation, costs incurred in
enforcing the applicable indemnity), of every kind and description, contingent
or otherwise, incurred by or awarded against a party to the extent indemnified
in accordance with any provision of this Agreement.
"Closing Date" shall have the meaning set forth in Section 2.2(c).
"Court Order" shall have the meaning set forth in Section 2.1(a).
"Danton Group" shall have the meaning set forth in the preamble.
"FEC" shall have the meaning set forth in the preamble.
"FEC Stock" shall mean the common stock of FEC as presently constituted.
"Horan Agreement" shall have the meaning set forth in Section 3.2(e).
"Intellectual Property" shall have the meaning set forth in the recitals.
"Interim Agreement" shall have the meaning set forth in the recitals.
"LOC" shall have the meaning set forth in Section 2.1(a).
"Manufacturing Agreement" shall have the meaning set forth in Schedule C.
"Mr. Danton" shall have the meaning set forth in the preamble.
"Plan" shall have the meaning set forth in the recitals.
"PVA" shall have the meaning set forth in the recitals.
"PVA Stock" shall have the meaning set forth in the recitals.
"Software Release" shall have the meaning set forth in Schedule C.
"VLC" shall have the meaning set forth in the preamble.
-2-
<PAGE>
ARTICLE II
PURCHASE AND SALE
Section 2.1. Prior to the Court Order. Within seven (7) days of the
date of this Agreement:
(a) FEC shall post a $150,000 letter of credit (the "LOC") with
bankruptcy counsel for PVA, which LOC will not be used until the Plan is
approved by a non-appealable court order (the "Court Order"). It is anticipated
that the Court Order will be issued no later than 120 days from the date of the
posting of the LOC. The Danton Group shall use its best efforts to obtain the
Court Order, provided, however, that the Danton Group shall not be required to
expend any money in attempting to secure the Court Order. During the term of
this Agreement, the Danton Group shall keep FEC fully informed of all matters
relating to the Plan and the Court Order and shall allow FEC to participate in
all proceedings necessary to obtain the Court Order. If the Court Order is not
obtained within 180 days of the date of this Agreement, then either party may
terminate this Agreement upon 10 days prior written notice to the other party,
provided that the Danton Group may terminate this Agreement after 180 days only
if (A) the Danton Group has used its best efforts to obtain the Court Order as
provided in this paragraph (a) and (B) the court has rejected the Plan. After
the giving of such notice, the Danton Group will (1) arrange to have the LOC
returned to FEC and (2) shall, promptly upon the consummation of the sale or
other disposition of the Assets to a third party, pay to FEC the sum of US Two
Hundred Six Thousand Nine Hundred Eighty Six Dollars (US$206,986.00). If the
Danton Group terminates this Agreement pursuant to this Section 2.1(a), the
Danton Group shall, at any time within 12 months from the date of such
termination (this 12 month period hereinafter is referred to as the "FEC Option
Period"), give FEC the right to purchase the Assets on terms and conditions, at
the option of FEC, that are either the same as those negotiated by the Danton
Group with a third party or on the terms and conditions contained in this
Agreement to the extent such terms and conditions are applicable. FEC shall,
within 30 days of receipt of notice from the Danton Group of the Danton Group's
intention to sell to a third party and the proposed terms of the sale, provide
written notice (the "FEC Purchase Notice") to the Danton Group setting forth
FEC's decision of whether or not to purchase the Assets and, if FEC determines
it wishes to purchase the Assets, such notice shall state whether FEC desires to
reinstate this Agreement, to the extent its terms and conditions are applicable,
or upon the terms and conditions negotiated by the Danton Group with a third
party. If FEC fails to respond within the 30 day period (the "Notice Period")
described in the preceding sentence, FEC shall be deemed to have waived its
right to purchase the Assets pursuant to this Section 2.1(a). In the case that
the FEC Purchase Notice evidences FEC's intent not to purchase the Assets or FEC
is deemed to have waived its right to purchase the Assets, then the Danton Group
shall be permitted to sell the Assets to any third party within 90 days of the
later of the date of the FEC Purchase Notice or the termination of the Notice
Period. If no such sale occurs, then this right of first refusal shall apply
again, provided that the FEC Option Period has not expired.
-3-
<PAGE>
(b) VLC shall grant to FEC a 180 days license to distribute and license
PVA electronic tournament poker terminals in the State of California (the
"License"), all in accordance with the Interim Agreement, which license will be
terminated upon delivery of the second payment in Section 2.2(b) (assuming that
the first payment has been made). If (1) the Plan has not been rejected by the
bankruptcy court, (2) the Court Order has not been obtained within 180 days from
the date of this Agreement, and (3) neither party has terminated this Agreement
pursuant to the terms of Section 2.1(a) above, then VLC shall renew the License
for an additional 180 days.
(c) FEC shall execute an assumption agreement with PVA assuming PVA's
obligations under an agreement with Pace Reich, Esq. or his law firm (or assume
PVA's obligations under such an agreement) in the form of Exhibit C attached
hereto to provide for the payment of the balance of PVA's bankruptcy counsel's
fees, which shall not exceed US Three Hundred Thousand Dollars (US$300,000.00)
("Counsel Fees"), but in no event shall the amount of the proceeds of the LOC
applied to the Counsel Fees be less than $100,000. Subject to the foregoing, the
parties acknowledge and agree that after the payment of all non-administrative
claims, any amounts remaining in the LOC shall be used to pay a portion of the
Counsel Fees. FEC's obligation to make such payments to PVA's bankruptcy counsel
shall become effective immediately upon the issuance of the Court Order or will
terminate if this Agreement is terminated pursuant to Section 2.1(a).
(d) On the date of the Court Order, FEC shall assume all of the
obligations of the Danton Group for any interest payments and/or administrative
fees required under two letters of credit (the "Danton LCs") in the maximum
amount of $150,000 (in favor of Michael J. Horan) and $100,000 (in favor of
Amusement World, Inc.), respectively, and shall indemnify and hold harmless the
Danton Group against any and all liabilities and obligations relating to
interest payments and/or administrative fees of the Danton Group arising under
the Danton LCs. The parties hereto acknowledge and agree that Mr. Danton will
use a part of the payment under Section 2.2(b)(i) to discharge all of the
liabilities secured by the Danton LCs, following which the Danton LCs will be
canceled.
Section 2.2. After the Court Order. (a) Within seven (7) days of the
issuance and delivery to FEC of the Court Order, FEC shall deliver to Mr. Danton
or his designee 1,000,000 shares of FEC Stock, free and clear of all liens and
encumbrances, duly endorsed in blank or accompanied by executed blank stock
powers and otherwise in form for transfer. The parties acknowledge and agree
that the upon issuance and for so long as (1) all of the principal shareholders
of FEC are parties to a pooling agreement, Mr. Danton or his designee will
subject its FEC Stock delivered pursuant to this Agreement to a pooling
agreement on substantially the same terms and conditions as the other principal
stockholders FEC Stock are subject to, which terms include those set forth on
Exhibit D hereto; and (2) FEC is not in default under this Agreement and has not
otherwise terminated this Agreement, then the FEC Stock delivered to Mr. Danton
or his designee pursuant to this Agreement will be subject to a voting trust
agreement on substantially the terms described in Exhibit E hereto.
-4-
<PAGE>
(b) FEC shall pay to Mr. Danton or his designee by wire transfer the
sum of (i) US Four Hundred Seventeen Thousand Five Hundred Dollars (US$417,500)
(in immediately available funds) within thirty (30) days from the date of the
issuance and delivery to FEC of the Court Order; and (ii) US Four Hundred
Seventeen Thousand Five Hundred Dollars (US$417,500) (in immediately available
funds) within one hundred twenty (120) days of the issuance and delivery to FEC
of the Court Order, to a bank account to be designated by Mr. Danton or his
designee. The obligations of FEC under this paragraph (b) shall be evidenced by
a promissory note (the "Initial Promissory Note") delivered by FEC to the Danton
Group on the date of the signing of this Agreement. The Initial Promissory Note
will be non-negotiable and shall, by its terms, become effective immediately
upon receipt of the Court Order without further action on the part of any of the
parties. Upon payment of the amounts secured by the Initial Promissory Note, the
Danton Group shall deliver the Initial Promissory Note to FEC.
(c) Concurrently with the delivery of the second payment (assuming the
first payment under Section 2.2(b)(i) has been paid to the Danton Group by FEC)
of US$417,500 described in Section 2.2(b)(ii) above (such date of delivery
hereinafter referred to as the "Closing Date"), Mr. Danton shall deliver to FEC
(I) the PVA Stock, free and clear of all liens and encumbrances, duly endorsed
in blank or accompanied by executed blank stock powers and otherwise in form for
transfer, (II) the Danton Group shall transfer to FEC the debt owed by PVA to
the Danton Group, (III) the Danton Group shall assign to FEC its rights under
the Manufacturing Agreement and the Software Release and (IV) the Danton Group
shall deliver any rights, documents, papers, files (whether paper or electronic)
and other materials in the Danton Group's possession or control related to PVA
and the Intellectual Property by a document or documents in form and substance
reasonably acceptable to FEC and the Danton Group. Concurrently with the
delivery of the PVA Stock, FEC will enter into a stock pledge agreement with
VLC, thereby granting VLC a security interest in the PVA Stock, containing the
terms and conditions described on Exhibit G hereto. In addition, the Danton
Group shall cause the Interim Agreement to be terminated.
(d) In addition to the deliveries and payments to be made to the Danton
Group by FEC under paragraphs (a) and (b) of this Section 2.2, FEC shall,
subject to FEC's right of termination, make the following payments to VLC by
wire transfer of immediate available funds, which amounts shall be evidenced by
a promissory note (the "Second Promissory Note") from FEC to Mr. Danton:
(i) US$200,000 on or before December 18, 1997;
(ii) US$500,000 on or before July 22, 1998;
(iii) US$500,000 on or before July 22, 1999;
(iv) US$500,000 on or before July 22, 2000; and
(v) US$433,014 on or before July 22, 2001.
If FEC is unable to meet the foregoing payment timetable, Mr. Danton
will grant FEC reasonable extensions of time to make the payments, but in no
event shall any such extension exceed 120 days from the date the payment was
originally due. The Second Promissory Note shall be by its terms be
non-negotiable and, provided that all payments due under this Section 2.2(d) to
the Danton Group up to and including the Termination Date (as defined below)
have been paid to the Danton Group, the Second Promissory Note shall be
cancelable on the Termination Date (as defined below). Promptly upon
cancellation of the Second Promissory Note as described in the preceding
sentence or full payment of all amounts evidenced by the Second Promissory Note,
the Danton Group shall deliver the Second Promissory Note to FEC.
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<PAGE>
FEC may terminate this Agreement at any time after FEC has satisfied
all of its obligations under paragraphs (a) and (b) of this Section 2.2 upon
written notice (the "Termination Notice") to the Danton Group, provided that
upon such termination the Danton Group may, subject to not being prohibited by
applicable law, purchase from FEC (or if FEC is not the owner of the Repurchased
Assets (as defined below), FEC shall cause or otherwise arrange for the owner to
sell to the Danton Group) all of the Intellectual Property, the Software
Release, the Manufacturing Agreement and any and all other assets transferred to
FEC under this Agreement (other than the PVA Stock), together with any and all
rights, agreements, materials, intellectual property or other information
relating to the PVA electronic tournament poker game (collectively, the
"Repurchased Assets"), in each case free and clear of all liens, claims or any
encumbrances whatsoever, other than the Horan Agreement, the Interim Agreement
and the Canadian Agreements, and such other liens, claims or encumbrances
arising out of (a) transactions previously approved in writing by Mr. Danton,
such approval not to be unreasonably withheld, and (b) lawsuits incurred in the
ordinary course of business relating to PVA Electronic Tournament Poker, for a
purchase price, at the Danton Group's option, that is either (1) equal to the
amount of all cash payments made by FEC to the Danton Group with respect to the
Repurchased Assets to the date of termination, or (2) the delivery to FEC of all
of the FEC Stock issued to any member of the Danton Group, or their respective
designees, pursuant to the terms of this Agreement. After receipt of the
Termination Notice, the Danton Group shall cancel and deliver the Second
Promissory Note to FEC, provided that all payments due to the Danton Group under
this Section 2.2(d) up to and including the Termination Date have been paid to
the Danton Group. The Danton Group shall give FEC notice of its intention to
exercise its option to purchase the Repurchased Assets within 30 days of
receiving the Termination Notice from FEC. If the Danton Group exercises its
option to purchase the Repurchased Assets, the transaction shall be consummated
on or before 60 days from the Termination Date. "Termination Date", as used in
this Section 2.2(d), shall mean the date that the Danton Group is deemed to have
received the Termination Notice as provided in Section 5.4 hereof.
(e) Ninety (90) days after the completion of FEC's first fiscal year
ending after the Court Order is effective, and continuing on the anniversary
date of such date for five (5) years from such date, FEC (or its successor)
shall issue FEC Stock (or stock of the same type of FEC's successor, if any) to
Mr. Danton or his designee as follows:
The number of shares to be delivered each year pursuant to this
paragraph (e) shall equal the Predetermined Percentage times Net Earnings
divided by the Average Share Price.
For purposes of this paragraph (e):
"Net Earnings" shall mean the net earnings of FEC before corporate
income tax, depreciation and amortization from the revenues derived from the
Intellectual Property, all as calculated in accordance with generally accepted
accounting principles.
-6-
<PAGE>
"Average Share Price" shall mean the average trading price on the
NASDAQ or such other stock exchange or quotation system for the last thirty (30)
trading days of the fiscal year for FEC or its successor. In the event FEC is
not a publicly traded company, the Average Share Price shall be calculated by
determining, in accordance with generally accepted accounting principles, the
book value of each share of FEC Stock.
"Predetermined Percentages" shall mean:
Year 1 2%
Year 2 3%
Year 3 4%
Year 4 5%
Year 5 10%
provided that the Predetermined Percentage will automatically increase to 10%
once Net Earnings are at least $10 million. "Year 1" shall commence on the date
that the Court Order is effective, and each subsequent year shall be determined
as the anniversary of such date.
If there is a merger of FEC with another corporation or other type of
entity, or a change of control of FEC, or a sale by FEC of all or substantially
all of the Assets, then FEC or its successor shall have no further obligation to
issue shares under this Section 2.2(e), except for a one time bonus equal to the
number of earn out shares issued to Mr. Danton for the last completed fiscal
year.
(f) In the event FEC licenses rights derived from the Intellectual
Property, FEC shall pay to Mr. Danton twenty percent (20%) of all upfront
licensing fees paid or payable to FEC, provided that FEC shall provide copies of
all licensing agreements relating to the Intellectual Property to the Danton
Group.
(g) Nothing in this Agreement shall prohibit or interfere with the
ability of FEC to enter into a merger or other reorganization or transaction for
the purposes of obtaining financing, provided that the FEC Stock held by Mr.
Danton shall be treated in the same manner as all other FEC Stock.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
Section 3.1. FEC Representations and Warranties. FEC represents and
warrants to VLC as follows:
(a) FEC is a Bahamian corporation, duly organized and in good standing
under the laws of Bahamas.
(b) FEC has the corporate power and authority to enter into this
Agreement and to consummate the transactions contemplated herein. This Agreement
has been duly authorized and executed and constitutes the valid and binding
obligations of FEC enforceable against FEC in accordance with its terms.
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(c) The purchase and ownership of the PVA Stock by FEC is permitted
under the laws, rules and regulations applicable to FEC (the "FEC Laws"); no
member of the Danton Group is required to register the PVA Stock with any
governmental or quasi-governmental authority or otherwise provide notice or make
any other filing in connection with the transactions contemplated hereunder, in
each case under the FEC Laws; the transactions contemplated hereunder do not
require any member of the Danton Group to take any action under any the FEC
Laws, or otherwise obtain the consent of any governmental or quasi-governmental
entity under the FEC Laws.
(d) FEC has made its own investigations and conducted its own due
diligence with respect PVA, the PVA Stock, the Intellectual Property and the
transactions contemplated by this Agreement. Except as expressly set forth
herein, FEC is not relying on any representations, oral or written, by William
M. Danton, VLC or any of its representatives, consultants, agents or employees.
(e) FEC has only one class of stock authorized, issued and outstanding
and that stock is the voting common stock of FEC entitled to unlimited
dividends. Any reference herein to FEC stock or FEC Stock shall mean the voting
common stock of FEC, provided that in the event of a merger or other
reorganization of FEC pursuant to which holders of FEC voting common stock
receive other securities, those other securities shall be deemed to be FEC Stock
for the purposes hereof and shall be treated in the same manner as all other FEC
Stock is treated. The charter documents of FEC in effect on the date hereof have
been delivered to the Danton Group and, except as provided in Section 2.2(g) (or
otherwise with the prior written consent of the Danton Group, which consent
shall not be unreasonably withheld), shall not be revised, amended or modified
in any way whatsoever during the term of this Agreement.
(f) FEC is acquiring the PVA Stock for investment and not with a view
toward any resale or distribution thereof.
Section 3.2. Danton Group Representations and Warranties. The Danton
Group represents and warrants to FEC and acknowledges that FEC is relying upon
such representations and warranties in entering into this Agreement:
(a) VLC is a corporation, duly authorized, validly existing and in good
standing under the laws of the State of Maine;
(b) VLC has the corporate power and authority to enter into this
Agreement and to consummate the transactions contemplated herein. This Agreement
has been duly authorized and executed and constitutes the valid and binding
obligations of the Danton Group enforceable against the Danton Group in
accordance with its terms;
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(c) to the best knowledge of the Danton Group, PVA is the owner of the
Intellectual Property subject to (i) the rights of Michael J. Horan as set forth
in the Settlement Agreement, dated January 31, 1997 (the "Horan Agreement"),
among Michael J. Horan, William M. Danton, PVA, and VLC, (ii) the rights of VLC
pursuant to the Interim Agreement and (iii) the Canadian Agreements;
(d) on the Closing Date Mr. Danton will own all of the PVA Stock free
and clear of any claims or encumbrances;
(e) subject to the receipt of the Court Order, they have the authority
to enter into this Agreement and to complete the transactions contemplated
hereby, without the approval or consent of any other person or authority;
(f) other than as set forth in paragraphs (c) and (k) of this Section
3.2, at Closing no entity other than FEC will have any right to claim or acquire
an interest in PVA or its assets;
(g) on the Closing Date, PVA will not have any liabilities, accrued or
otherwise, except pursuant to the Horan Agreement, the Interim Agreement and the
Canadian Agreements;
(h) the Danton Group has no reason to believe that the PVA Stock will
not on Closing be validly issued and outstanding as fully paid and
non-assessable, and the PVA Stock will be on the Closing Date free and clear of
all liens, charges and encumbrances, and the PVA Stock will on the Closing
represent 100% of the issued and outstanding shares of stock in PVA ;
(i) upon receipt of the Court Order, Mr. Danton will have good and
sufficient title, right and authority to enter into this Agreement on the terms
and conditions hereof and to transfer to FEC the legal and beneficial title and
ownership of the PVA Stock as contemplated hereunder;
(j) there will be, as of the Closing Date, no rights, subscriptions,
convertible or exchangeable securities, options, warrants or any other agreement
outstanding with respect to the purchase or issuance of shares of stock in PVA;
(k) the Danton Group has provided FEC with copies of the Canadian
Agreements. With respect to all other agreements, the performance of this
Agreement will not conflict with or result in a breach of any covenants or
agreements contained in, or constitute a default under or result in the creation
of any encumbrance pursuant to the provisions of, any agreement to which any of
the Danton Group or PVA is a party or by which any of the Danton Group or PVA
may be bound or to which any of the Danton Group or PVA may be subject or any
judgment, decree, order, rule or regulation of any court or administrative body
by which any of the Danton Group or PVA is bound or, to the knowledge of the
Danton Group, any statute or regulation applicable to the Danton Group or PVA;
(l) on the Closing Date, PVA will be in good standing under the laws of
the jurisdiction in which it was formed and is duly qualified to carry on
business in the jurisdiction where it carries on business;
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(m) each member of the Danton Group has full power and capacity to
enter into this Agreement and all necessary acts of the Danton Group have been
performed in order to authorize this Agreement;
(n) subject to receipt of the Court Order, the entering into and the
performance of this Agreement and the transactions contemplated hereby will not
result in the violation of any of the terms and provisions of the charter
documents of PVA or any member of the Danton Group, any shareholders' or
directors' resolutions, or any indenture or other agreement (except for the
Canadian Agreements), written or oral, to which PVA or the Danton Group may be
bound or by which PVA or the Danton Group may be subject or any judgment,
decree, order, rule or regulation of any court or administrative body by which
PVA or the Danton Group is bound or to the knowledge of PVA or the Danton Group,
any statute or regulation applicable to PVA or the Danton Group;
(o) the capital of PVA is as described in Schedule A;
(p) the Danton Group will deliver on the Closing Date, the corporate
records of PVA, the share certificate book, register of directors and
shareholders and minute book of PVA that is in the Danton Group's possession. To
the Danton Group's knowledge, the duly elected or appointed directors and
officers of PVA are as set out in Schedule B, each of whom will resign on or
before the Closing as directed by FEC;
(q) Schedule C constitutes a complete list of all rights being
transferred to FEC by the Danton Group (the "Assets") and constitutes all of the
assets owned by the Danton Group related to PVA and the Intellectual Property;
(r) there is not any litigation, proceeding or investigation pending or
threatened against PVA or the Danton Group nor does the Danton Group know, or
have any grounds to know, of any basis for any litigation, proceeding or
investigation against PVA or the Danton Group, any of which would materially
affect PVA. Without limiting the generality of the foregoing and except for the
court recognized debts owned by the Danton Group which are being transferred to
FEC pursuant to this Agreement, there are, and on Closing there will be, no
intercorporate debts or liabilities between the Danton Group and PVA or any of
the Danton Group's affiliates;
(s) to the best of the knowledge of the Danton Group, PVA has complied
with any and all rules, regulations and policies and any and all regulatory
authorities, agencies and commissions having jurisdiction over PVA or its assets
or to which PVA or its assets may be subject;
(t) to the best knowledge of the Danton Group, PVA has not guaranteed,
nor agreed to guarantee, and is not otherwise obligated to act as surety with
respect to any debt, liability or other obligation of any person, firm or
corporation and on the Closing Date PVA will not have any such obligations;
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(u) PVA does not have any employees and has not paid, nor agreed to
pay, any benefits under and does not have any pension, profit sharing, bonus or
other similar plan;
(v) Except for the Canadian Agreements and the Interim Agreement, PVA
does not have outstanding, nor is it party to any material agreement, contract
or commitment, whether written or oral, of any nature or kind whatsoever;
(w) the Danton Group does not have outstanding, nor is it party to any
agreement, contract or commitment, whether written or oral, of any nature or
kind whatsoever relating to PVA electronic tournament poker, except the material
contracts (the "Supplemental Material Contracts") as set out in Exhibit F. Each
of the Supplemental Material Contracts has been duly authorized, executed and
delivered by the member of the Danton Group purporting to execute such
Supplemental Material Contract and is a legal, valid and binding obligation of
such member of the Danton Group enforceable in accordance with its terms;
(x) to the Danton Group's actual knowledge, PVA has been and is in
compliance with all applicable federal, state, municipal and local laws,
statutes, ordinances, by-laws and regulations and all orders, directives and
decisions rendered by any ministry, department or administrative or regulatory
agency (collectively, the "Environmental Laws") relating to the protection of
the environment, occupational health and safety or the manufacture, processing,
distribution, use, treatment, storage, disposal, discharge, transport or
handling of any pollutants, contaminants, chemicals or industrial, toxic or
hazardous wastes or substances (collectively, the "Hazardous Substances"). To
the best of the knowledge of the Danton Group, PVA has obtained all licenses,
permits, approvals, consents, certificates, registrations and other
authorizations under the Environmental Laws (collectively, the "Environmental
Permits") required for the operation of its business as currently being
conducted. To the Danton Group's actual knowledge, each Environmental Permit is
valid, subsisting and in good standing and PVA is not in default or breach of
any Environmental Permit and no proceeding is pending or threatened to revoke or
limit any Environmental Permit. To the best knowledge of the Danton Group, PVA
has not used or permitted to be used, except in compliance with all
Environmental Laws, any of its property or facilities or any property or
facility that it previously owned or leased to generate, manufacture, process,
distribute, use, treat, store, dispose of, transport or handle any Hazardous
Substance. To the Danton Group's actual knowledge, PVA has never received any
notice of, nor been prosecuted for an offense alleging, non-compliance with any
Environmental Laws, and neither the Danton Group nor PVA have settled any
allegation of non-compliance short of prosecution. There are no orders or
directions relating to environmental matters requiring any work, repairs,
construction or capital expenditures with respect to the business or any
property or the assets of PVA nor has PVA received notice any of the same. To
the Danton Group's actual knowledge, PVA has not caused or permitted, nor does
the Danton Group have any knowledge of, the release, in any manner whatsoever,
of any Hazardous Substance on or from any of PVA's properties or assets or any
property or facility that PVA previously owned or leased, or any such release on
or from a facility owned or operated by third parties but with respect to which
PVA is or may reasonably be alleged to have liability. To the Danton Group's
actual knowledge, all Hazardous Substances and all other wastes and other
materials and substances used in whole or in part by PVA or resulting from the
business of PVA have been disposed of, treated and stored in compliance with all
Environmental Laws. To the Danton Group's actual knowledge, PVA has not received
any notice that it is potentially responsible for a federal, state, municipal or
local site clean-up or corrective action under any Environmental Laws;
-11-
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(y) subject to the Interim Agreement, the Horan Agreement and the
Canadian Agreements, PVA is the owner of all right, title and interest in and to
the Intellectual Property, free and clear of all liens, security interests,
charges, encumbrances, and other adverse claims, and has the right to use
without payment to a third party all of the Intellectual Property;
(z) subject to the Horan Agreement and the Interim Agreement, no member
of the Danton Group and no present or past employee, director, officer or
shareholder of PVA owns directly or indirectly, in whole or in part, any
intellectual property which PVA is presently using or which is necessary for the
conduct of PVA's business relating to PVA electronic tournament poker;
(aa) to the Danton Group's actual knowledge, the patent listed in
Exhibit A (the "Patent") is currently in compliance with formal legal
requirements (including payment of filing, examination, maintenance fees and
proofs of working or use) is valid and enforceable, and is not subject to any
maintenance fees or taxes. To the Danton Group's actual knowledge, the Patent
has not been and is not now involved in any interference, reissue, reexamination
or opposition proceeding. To the Danton Group's actual knowledge, there is no
potentially interfering patent or patent application of any third party. To the
Danton Group's knowledge, without investigation, the Patent is not infringed and
has not been challenged or threatened in any way. To the Danton Group's actual
knowledge, neither PVA electronic tournament poker nor any of the products
manufactured, sold or licensed, nor any process or know-how used by PVA
infringes or is alleged to infringe any patent or other proprietary right of any
other person or entity;
(bb) to the Danton Group's actual knowledge, the copyrights described
in Exhibit A (the "Copyrights") have been registered and are currently in
compliance with form legal requirements, are valid and enforceable, and are not
subject to any maintenance fees or taxes or actions. To the Danton Group's
actual knowledge, no Copyright is infringed or has been challenged or threatened
in any way. To the Danton Group's actual knowledge, none of the subject matter
of any of the Copyrights infringes or is alleged to infringe any copyright of
any third party or is a derivative work based on the work of a third party.
ARTICLE IV
COVENANTS
Section 4.1. FEC Covenants. FEC further covenants and agrees as
follows:
(a) FEC shall use commercially reasonable efforts to (i) complete a
reorganization and/or financing of FEC within six (6) months from the date of
the Agreement and (ii) commercially promote, market and otherwise distribute the
PVA electronic tournament poker terminals.
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<PAGE>
(b) FEC will defend, indemnify and hold harmless the Danton Group and any of its
respective representatives, consultants, officers, directors, employees and
agents, including but not limited to Mr. Danton and Mr. Silvester, from and
against any and all Claims arising out of any public offering of FEC Stock or
any other securities of FEC or its affiliates.
(c) FEC shall promptly perform all of its obligations hereunder, including the
prompt delivery to VLC of all payments required pursuant to this Agreement.
(d) FEC acknowledges and agrees that the Danton Group desires to own stock in an
entity that owns, either directly or indirectly, the Assets and that FEC shall
not transfer or otherwise dispose of any or all of the Assets (except pursuant
to a merger or reorganization as provided in Section 2.2(g) or with prior
written consent of the Danton Group, which consent shall not be unreasonably
withheld) during the term of this Agreement.
Section 4.2. Danton Group Covenants. The Danton Group further covenants
and agrees as follows:
(a) On the Closing Date and concurrent with the delivery of the second payment
to the Danton Group (assuming the first payment has been made) pursuant to
Section 2.2(b), Mr. Danton and/or VLC, as applicable, shall deliver to FEC all
instruments and other agreements evidencing the transfer to FEC of the Danton
Group's rights in and to the Assets.
(b) During the period from the date of this Agreement to the Closing Date or the
other termination or expiration of this Agreement, the Danton Group shall
preserve the existing organization of PVA's business; continue to conduct the
financial and other operations of PVA's business in the same manner as in the
prior conduct of such business; not to sell or otherwise transfer any of PVA's
assets unless in the ordinary course of PVA's business; and not to take any
action inconsistent with the Danton Group's obligations under this Agreement.
(c) That the Danton Group shall promptly perform all of its obligations
hereunder.
(d) The Danton Group will indemnify and hold harmless FEC from and against any
and all Claims (i) arising out of the Canadian Agreements or (ii) resulting from
an invalidity, infringement, lack of enforceability or interference with the
Intellectual Property, in each case resulting from events or activities
occurring on or before the Closing Date, provided that this indemnification
shall not apply in the case of any Claims arising from or related to the
negligence, misrepresentation or willful misconduct of FEC or any of its
directors, employees, representatives or agents.
ARTICLE V
MISCELLANEOUS
Section 5.1. Survival. The obligations to indemnify contained in this
Agreement and the representations and warranties made in this Agreement or made
pursuant hereto shall survive the consummation of the transactions contemplated
by this Agreement, and shall survive any independent investigation by FEC or
VLC, and any dissolution, merger or consolidation of FEC or VLC and shall bind
the legal representatives, assigns and successors of FEC and VLC.
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Section 5.2. Entire Agreement; Amendment; and Waivers. This Agreement
and the agreements required to be delivered pursuant hereto constitute the
entire agreement between the parties pertaining to the subject matter hereof,
and supersede all prior agreements, understandings, negotiations and discussions
of the parties, whether oral or written, and there are no warranties,
representations or other agreements between the parties in connection with the
subject matter hereof, except as specifically set forth herein. No amendment,
supplement, modification, waiver or termination of this Agreement shall be
binding unless executed in writing by the party to be bound thereby. No waiver
of any of the provisions of this Agreement shall be deemed or shall constitute a
waiver of any other provision or breach of this Agreement, whether or not
similar, unless otherwise expressly provided.
Section 5.3. Benefit; Assignment. This Agreement shall be binding upon
and inure to the benefit of and shall be enforceable by FEC and the Danton Group
and their respective successors and assigns. This Agreement (and any rights,
obligations or liabilities hereunder) may be assigned or delegated in whole or
in part by either party, provided that FEC or the Danton Group, as the case may
be, shall not be released from its liabilities and obligations hereunder upon
any such assignment or delegation.
Section 5.4. Notices. All communications or notices required or
permitted by this Agreement shall be in writing and shall be deemed to have been
given at the earlier of the date when actually delivered to the other party, or
when sent by confirmed telecopy or facsimile machine to the number shown below,
or when properly deposited for delivery by a nationally recognized commercial
overnight delivery service, prepaid, and addressed as follows, unless and until
either of such parties notifies the other in accordance with this Section of a
change of address or change of telecopy number:
If to FEC: Mr. Bryan Dear
Fortune Entertainment Corporation
#303-543 Granville Street
Vancouver, BC Canada
V6C 1X8
Facsimile: (604) 689-7087
With a copy to: Douglas Seppala, Esq.
DuMoulin Black
10th Floor - 595 Howe Street
Vancouver, British Columbia
V6C 2T5
Facsimile: (604)687-3635
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If to VLC or
Mr. Danton: Mr. William M. Danton
144 Elm Street
Second Floor
Suite 16
Biddeford, ME 04005
Facsimile: (207) 286-2858
With a copy to: Harold C. Pachios, Esq.
Preti, Flaherty, Beliveau & Pachios, LLC
443 Congress Street
P.O. Box 11410
Portland, ME 04104-7410
Facsimile: (207) 791-3111
Section 5.5. Counterparts; Headings. This Agreement may be executed in
several counterparts, each of which shall be deemed an original, but such
counterparts shall together constitute but one and the same Agreement. This
Agreement may be executed and delivered in counterpart signature pages executed
and delivered via facsimile transmission, and any such counterpart executed and
delivered via facsimile transmission shall be deemed an original for all intents
and purposes. The ARTICLE and SECTION headings in this Agreement are inserted
for convenience of reference only and shall not constitute a part hereof.
Section 5.6. Severability. If any provision, clause or part of this
Agreement or the application thereof under certain circumstances is held
invalid, or unenforceable, the remainder of this Agreement, or the application
of such provision, clause or part under other circumstances, shall not be
affected thereby.
Section 5.7. No Reliance. No third party is entitled to rely on any of
the representations, warranties or agreements of FEC or VLC contained in this
Agreement; and FEC and VLC assume no liability to any third party because of any
reliance on the representations, warranties or agreements of FEC and VLC
contained in this Agreement.
Section 5.8. Governing Law. This Agreement shall be construed and
interpreted according to the laws of the State of Delaware without regard to the
conflict of law principles thereof.
Section 5.9. Interpretation. Should any provision of this Agreement
require interpretation, the parties hereto agree that the interpreter shall not
apply a presumption that the terms hereof shall be more strictly construed
against one party by reason of the rule of construction that a document is to be
construed more strictly against the party which itself or through its agent
prepared the same, it being agreed that the agents of each party have
participated in the preparation hereof.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by its duly authorized officers on the day and year first above
written.
FORTUNE ENTERTAINMENT CORPORATION
By_____________________________________
Name
Title
VIDEO LOTTERY CONSULTANTS, INC.
By______________________________________
Name
Title
William M. Danton signs this Agreement for the limited purpose of being bound by
the representations, warranties, agreements, indemnities and covenants of
William M. Danton, and otherwise assumes no liability, responsibility or
obligations hereunder.
______________________________________
William M. Danton
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EXHIBIT A
INTELLECTUAL PROPERTY
U.S. Patent Number: 4,648,604
Copyright Registration Numbers: TXU 187-640
TXU 150-465
The above mentioned intellectual property is subject to the Horan
Agreement, the Interim Agreement and the Canadian Agreements.
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EXHIBIT B
[INTENTIONALLY OMITTED]
-18-
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EXHIBIT C
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EXHIBIT D
POOLING AGREEMENT
The pooling agreement shall be entered into upon issuance of the FEC
Stock and shall become effective on the date on which the FEC Stock is listed,
posted and called for trading on a stock exchange or an over-the-counter market
(the "Effective Date") and shall provide that any restrictions placed on FEC
Stock subject to the pooling agreement shall be released as follows:
1. 25% of the FEC Stock shall be released from the pooling restrictions
on or after the Effective Date;
2. an additional 25% of the FEC Stock shall be released from the
pooling restrictions on or after a minimum of 3 months from the Effective Date;
3. an additional 25% of the FEC Stock shall be released from the
pooling restrictions on or after a minimum of 6 months from the Effective Date;
and
4. an additional 25% of the FEC Stock shall be released from the
pooling restrictions on or after a minimum of 9 months from the Effective Date.
The pooling agreement shall contain other customary terms and
conditions reasonably satisfactory to FEC and the Danton Group.
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EXHIBIT E
VOTING TRUST AGREEMENT
The voting trust agreement shall provide as follows:
1. The parties to the voting trust agreement shall be Mr. Danton, or
his designee, Mr. Bruce Horton and FEC.
2. Mr. Danton, or his designee, shall agree to permit Mr. Horton to
cast the votes allocated to the FEC Shares issued or transferred to Mr. Danton,
or his designee, pursuant to the Purchase and Sale Agreement, dated September 5,
1997 (the "Purchase Agreement"), between the Danton Group and FEC as Bruce
Horton it his absolute discretion may determine.
3. The voting trust agreement shall automatically terminate upon (a)
FEC's breach of the Purchase Agreement or (b) FEC's termination of the Purchase
Agreement or (c) on the date of a bone fide arms-length transfer of the FEC
Stock by Mr. Danton or his designee with respect to the FEC Stock so transferred
or sold by Mr. Danton or his designee.
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EXHIBIT F
SUPPLEMENTAL MATERIAL CONTRACTS
Manufacturing Agreement
Software Release
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EXHIBIT G
STOCK PLEDGE AGREEMENT
FEC shall grant Mr. Danton or his designee a security interest in the
PVA Stock on the following terms and conditions:
1. FEC shall deliver to Mr. Danton or his designee the PVA Stock
certificate(s), together with executed, undated blank stock powers and otherwise
in form for transfer, which certificate(s) will be held in escrow pursuant to
the terms of the stock pledge agreement.
2. So long as any of the PVA Stock is subject to the stock pledge
agreement, FEC shall not be permitted to change, amend or modify in any way
whatsoever the bylaws and certificate of incorporation of PVA without the prior
written consent of the Danton Group, which consent shall not be unreasonably
withheld.
3. So long as any of the PVA Stock is subject to the stock pledge
agreement, FEC shall not be permitted to sell, convey or otherwise transfer the
PVA Stock, the Intellectual Property, the Manufacturing Agreement and the
Software Release or place any liens or any encumbrances whatsoever on the PVA
Stock, the Intellectual Property, the Manufacturing Agreement or the Software
Release, in each case without the prior written consent of the Danton Group,
which consent shall not be unreasonably withheld. PVA shall not incur any debt,
liability or other obligation or responsibility whatsoever without first
obtaining the prior written consent of the Danton Group, which consent shall not
be unreasonably withheld.
4. Mr. Danton or his designee, as applicable, shall agree to release
the PVA Stock from the security interest granted by the stock pledge agreement
pursuant to the following schedule, provided that all payments due and payable
under the Initial Promissory Note have been made by FEC to Mr. Danton or his
designee:
(a) Upon receipt by Mr. Danton or his designee of the $200,000
payment due on or before December 18, 1997 under the Second Promissory Note,
4.5% of the PVA Stock shall be released;
(b) Upon receipt by Mr. Danton or his designee of the $500,000
payment due on or before July 22, 1998 under the Second Promissory Note, an
additional 11.5% of the PVA Stock shall be released;
(c) Upon receipt by Mr. Danton or his designee of the $500,000
payment due on or before July 22, 1999 under the Second Promissory Note, an
additional 11.5% of the PVA Stock;
(d) Upon receipt by Mr. Danton or his designee of the $500,000
payment due on or before July 22, 2000 under the Second Promissory Note, an
additional 11.5% of the PVA Stock; and
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(e) Upon receipt by Mr. Danton or his designee of the $433,
014 payment due on or before July 22, 2001 under the Second Promissory Note, the
balance of the PVA Stock, provided that FEC is not in default under the Purchase
and Sale Agreement, dated as of September 5, 1997, the stock pledge agreement or
the Initial Promissory Note or the Second Promissory Note.
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SCHEDULE A
PVA CAPITAL STRUCTURE
1,000 shares with a par value of $1.00 per share
-25-
<PAGE>
SCHEDULE B
DIRECTORS AND OFFICERS OF PVA
Directors
- - ---------
William M. Danton
Theodore Silvester
Officers
- - --------
Alan Cohen
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<PAGE>
SCHEDULE C
LIST OF DANTON GROUP RIGHTS AND MATERIALS BEING TRANSFERRED TO FEC
1. Intellectual Property;
2. PVA Stock;
3. Manufacturing Agreement, dated April 24, 1997 (the "Manufacturing
Agreement"), between Amusement World, Inc. and VLC;
4. Software Release Agreement (the "Software Release") among Amusement
World, Inc., Stephen D. Holniker and William M. Danton; and
5. Any rights, documents, papers, files (whether paper or electronic) and
other materials in the Danton Group's possession or control related to
PVA and the Intellectual Property.
The above is being transferred subject to the terms, conditions and
representations contained in the Agreement.
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NON-NEGOTIABLE PROMISSORY NOTE
US$835,000.00 September 5, 1997
FOR VALUE RECEIVED, the FORTUNE ENTERTAINMENT CORPORATION, a Bahaman
corporation ("Maker"), promises to pay to WILLIAM M. DANTON, an individual with
an address in the City of Biddeford, County of York, State of Maine m("Holder"),
or order, the principal sum of US Eight Hundred Thirty Five Thousand Dollars and
No Cents (US$835,000.00).
Principal shall be payable in two equal installments of US Four Hundred
Seventeen Thousand Five Hundred Dollars and No Cents (US$417,500.00) with the
first installment due and payable within thirty (30) days (the "Court Order
Date") from the date of delivery to the undersigned of non-appealable court
order approving a plan of reorganization for Professional Video Association,
Inc., a Delaware corporation, and the second installment due and payable within
120 days of the Court Order Date.
Prepayment shall be permitted, in whole or in part, without the payment
of any premium or charge.
If any such payments of principal are not paid when due, such unpaid
amounts shall accrue interest at an interest rate that is the lesser of (1)
fifteen percent (15%) per annum and (2) the highest rate permitted by applicable
law. Failure by the Holder to collect one or more such late charges shall not be
deemed a waiver by the Holder of its right to collect late charges for any other
instance of late payment.
In the event of (a) (i) default in the payment of any installment of
principal and interest due hereon, including any late charge, if such default is
continuing more than fifteen (15) days after the due date of said payment; or
(ii) any attachment, trustee process, lien, execution, levy, injunction, or
receivership issued or made against the Maker or the security for the note, not
removed within 90 days or if any final judgment or execution issued against
Maker remains unsatisfied for a period of 90 days; or (iii) entry of a decree or
order for relief with respect to Maker in any involuntary case under the British
of Columbia, Bahama, or federal bankruptcy laws, as now or hereafter
constituted, or any other applicable bankruptcy, insolvency or other similar
law, or appointing a receiver, liquidator, trustee, custodian (or similar
official) of Maker, or ordering the winding-up or liquidation of its affairs not
promptly contested and released or discharged within 30 days; or (iv)
commencement by the Maker of a voluntary case under the federal bankruptcy laws,
as now constituted or hereafter amended, or any other applicable federal or
state bankruptcy, insolvency or other similar law, or the consent by Maker to
the appointment of or taking possession by a receiver, liquidator, trustee,
custodian (or other similar official) of the Maker or for any substantial part
of its property, or the making by Maker of any assignment for the benefit of
creditors, or the insolvency or the failure of the Maker generally to pay its
debts as such debts become due, or the taking of action by the Maker in
furtherance of any of the foregoing; or (b) in the event of the occurrence of
any of the following events not cured within fifteen (15) days after written
notice by Holder to Maker (i) dissolution, liquidation, or business failure of
Maker or any party liable herefor; or (ii) the occurrence of any event, which,
under the terms of any evidence of indebtedness, mortgage, loan agreement or
other agreement or instrument which permits acceleration of the maturity of any
indebtedness of Maker to any third party or otherwise constitutes a default by
Maker under the terms of any such agreement or instrument, the Holder of this
Promissory Note shall have the option to declare due and payable at once the
entire principal balance hereof together with accrued interest at the rate
hereinabove provided. No delay by the Holder hereof in exercising any right or
remedy under any agreement, or other instruments or documents, or otherwise
afforded by law, shall operate as a waiver of any right or remedy or preclude
the exercise thereof during the continuance of any default.
1
<PAGE>
The Maker hereby waives presentment, demand, notice and protest, and
does also agree to pay all costs incurred by Holder in the collection of the
indebtedness evidenced hereby or in the preservation of or realization upon any
collateral which is security herefor, including all reasonable attorneys' fees
which may be incurred in connection therewith.
This Promissory Note is issued in connection with the Purchase and Sale
Agreement, dated September __, 1997, among Fortune Entertainment Corporation,
VLC, Inc. and William M. Danton and is subject to certain terms of that
agreement.
This Promissory Note is subject to the condition that at no time shall
the Maker be obligated or required to pay interest at a rate which could subject
the Holder hereof to either civil or criminal liability, forfeiture or loss of
principal, interest or other sums as a result of being in excess of the maximum
interest rate which Maker is permitted by law to contract or agree to pay or
which the Holder is permitted by law to receive. If by the terms of this note
the Maker would at any time be required or obligated to pay interest at a rate
in excess of such permitted maximum rate, the rate of interest under this
Promissory Note shall be deemed to be immediately reduced to such maximum rate
for so long as such maximum rate shall be in effect and shall thereafter be
payable at the rate herein provided.
This Promissory Note shall become effective immediately upon the date
the Court Order is issued without any further action on the part of the Maker or
Holder. This Promissory Note is non-negotiable.
If any obligation or portion of this Promissory Note is determined to
be invalid or unenforceable under law, it shall not affect the validity or
enforceability of the remaining obligations or portions hereof. The terms and
provisions hereof shall be construed pursuant to the laws of the State of
Delaware.
All payments due hereunder and any notice given by the Maker to the
Holder hereof shall either, at the option of the Holder, be made by wire
transfer according to instructions given by the Holder of this Promissory Note
to the Maker of this Promissory Note or addressed to William M. Danton, at 144
Elm Street, 2nd Floor, Suite 16, Biddeford, Maine 04005, unless written notice
of another address be given by the Holder hereof. Any notice shall be deemed
duly given if addressed in the manner herein provided and sent postage prepaid,
certified or registered mail, return receipt requested.
2
<PAGE>
This Promissory Note evidences a loan which is intended for use only
for business or commercial purposes (excluding agricultural purposes), and the
Maker hereby attests, warrants and certifies that the proceeds shall be used
exclusively for such purposes.
Maker will not, under any circumstances, rely on any oral statements,
promises or assurances made by or on behalf of Holder with respect to the loan
evidenced hereby, or Holder's intentions with respect thereto, including, but
not limited to, any statement, promise or agreement to execute any written
promise, contract, agreement or memorandum thereof.
The undersigned hereby subjects itself to the jurisdiction of the
courts of the State of Maine for any claims arising out of or related to this
Promissory Note.
FORTUNE ENTERTAINMENT
CORPORATION, INC.
By:_______________________
Its
3
<PAGE>
ASSUMPTION AGREEMENT
ASSUMPTION AGREEMENT (the "Agreement"), dated as of September 5, 1997,
by Fortune Entertainment Corporation, a Bahaman corporation ("FEC");
WITNESSETH
WHEREAS, PVA has entered into the Agreement, dated September 5, 1997
(the "Attorney Agreement"), with Pace Reich, Esq., PVA's bankruptcy counsel
("Attorney"), regarding the payment of Attorney's fees (the "Counsel Fees"),
which Attorney Agreement is attached hereto as Exhibit A; and
WHEREAS, FEC desires to assume certain of PVA's obligations under the
Attorney Agreement;
NOW, THEREFOR, for one dollar ($ 1.00) and other good and valuable
consideration, the parties hereto hereby agree as follows:
1. Subject to paragraph 6 hereof, FEC hereby assumes and agrees to pay,
satisfy, honor, perform and discharge, as and when due, and otherwise in
accordance with the Attorney Agreement, as of the date hereof, all liabilities,
obligations and commitments of PVA under the Attorney Agreement up to an amount
not to exceed US Three Hundred Thousand Dollars (US$300,000), excluding the
obligations of PVA under (i) the last sentence of paragraph l(b) of the Attorney
Agreement and (ii) paragraph 2 of the Attorney Agreement.
2. No amendment, supplement, modification, waiver or termination of
this Agreement shall be binding unless executed in writing by the party to be
bound thereby. No waiver of any of the provisions of this Agreement shall be
deemed or shall constitute a waiver of any other provision or breach of this
Agreement, whether or not similar, unless otherwise expressly provided.
3. All communications or notices required or permitted by this
Agreement shall be in writing and shall be deemed to have been given at the
earlier of the date when actually delivered to the other party, or when sent by
confirmed telecopy or facsimile machine to the number shown below, or when
properly deposited for delivery by a nationally recognized commercial ovemight
delivery service, prepaid, and addressed as follows, unless and until either of
such parties notifies the other in accordance with this Section of a change of
address or change of telecopy number:
If to PVA: Mr. William M. Danton
144 Elm Street
Second Floor
Suite 16
Biddeford, ME 04005
Facsimile: (207) 286-2858 With a copy to:
<PAGE>
Harold C. Pachios, Esq.
Preti, Flaherty, Beliveau & Pachios, LLC
443 Congress Street
P.O. Box 11410
Portland, ME 04104-7410
Facsimile: (207) 791-3111
If to FEC: Mr. Bryan Dear
Fortune Entertainment Corporation
#303-543 Granville Street
Vancouver, BC Canada
V6C IX8
Facsimile: (604) 689-7087
With a copy to: Douglas Seppala, Esq.
DuMoulin Black
10th Floor - 595 Howe Street
Vancouver, British Columbia
V6C 2T5
Facsimile: (604) 687-3635
4. This Agreement may be executed in several counterparts, each of
which shall be deemed an original, but such counterparts shall together
constitute but one and the same Agreement. This Agreement may be executed and
delivered in counterpart signature pages executed and delivered via facsimile
transmission, and any such counterpart executed and delivered via facsimile
transmission shall be deemed an original for all intents and purposes.
5. This Agreement shall be construed and interpreted according to the
laws of the State of Delaware without regard to the conflict of law principles
thereof.
6. Notwithstanding any other provision of this Agreement, FEC shall be
released from all of its obligations under this Agreement if the Purchase and
Sale Agreement, dated September 5, 1997, among FEC, Video Lottery Consultants,
Inc. and, with respect to certain provisions, William M. Danton is terminated
pursuant to Section 2. 1 (a) of that agreement.
IN WITNESS WHEREOF, the parties hereto execute this Agreement on the
day and year first above written.
FORTUNE ENTERTAINMENT
CORPORATION
____________________________ By______________________________
Witness
Its
<PAGE>
EXHIBIT A
AGREEMENT
THIS AGREEMENT dated as of the ____ day of September, 1997, between
PROFESSIONAL VIDEO ASSOCIATION, INC., a Delaware corporation ("PVA"), and PACE
REICH, ESQ., bankruptcy counsel for PVA ("Attorney"), on behalf of Flamm, Boroff
& Bacine, P.C. ("FB&B") and Clark, Ladner, Fortenbeau & Young ("CLF&Y");
W I T N E S S E T H:
WHEREAS, Attorney has acted as bankruptcy counsel for PVA at FB&B and
CLF&Y;
WHEREAS, PVA will owe FB&B and CLF&Y approximately Three Hundred
Thousand Dollars ($300,000.00) for attorneys fees and disbursements (together,
the "Counsel Fees") necessary to obtain an order reorganizing PVA;
WHEREAS, PVA desires to pay, and FB&B and CLF&Y desire to receive,
payment of the Counsel Fees pursuant to the terms and conditions of this
Agreement;
NOW, THEREFORE, for One Dollar ($1.00) and other good and valuable
consideration, the parties hereto hereby agree as follows:
1. Upon receipt by PVA of a final court order from the bankruptcy court
approving a plan of reorganization for PVA sponsored by William M. Danton, which
final order has become non-appealable (the "Court Order"), Attorney, on behalf
of FB&B and CLF&Y, agrees to accept payment of the Counsel Fees, subject to
approval of the bankruptcy court, as follows:
a. An amount equal to not less than $100,000 shall be payable on or as
soon as practicable after receipt of the Court Order from the proceeds of the
letter of credit delivered to Attorney by Fortune Entertainment Corporation in
connection with the plan of reorganization of PVA being sponsored by William M.
Danton;
b. The balance of the Counsel Fees shall be payable in quarterly
installments of $25,000 each commencing 90 days after receipt of the Court
Order, provided that the amount of the last installment, if less than $25,000,
shall be in an amount sufficient to satisfy the unpaid balance of the Counsel
Fees.
2. Within thirty (30) days of receipt of the Court Order, PVA shall
deliver to Attorney a letter of credit in the form attached hereto as Exhibit A,
which letter of credit shall at all times guarantee the entire unpaid balance of
Counsel Fees.
-1-
<PAGE>
3. Attorney shall coordinate the distribution of the amounts received
in payment of the Counsel Fees among FB&B and CLF&Y, with FB&B receiving payment
of its fees first.
4. No amendment, supplement, modification, waiver or termination of
this Agreement shall be binding unless executed in writing by the party to be
bound thereby. No waiver of any of the provisions of this Agreement shall be
deemed or shall constitute a waiver of any other provision or breach of this
Agreement, whether or not similar, unless otherwise expressly provided.
5. This Agreement (and any rights, obligations or liabilities
hereunder) may be assigned or delegated in whole or in part by PVA, provided
that PVA shall not be released from its liabilities and obligations hereunder
upon any such assignment or delegation.
6. All communications or notices required or permitted by this
Agreement shall be in writing and shall be deemed to have been given at the
earlier of the date when actually delivered to the other party, or when sent by
confirmed telecopy or facsimile machine to the number shown below, or when
properly deposited for delivery by a nationally recognized commercial overnight
delivery service, prepaid, and addressed as follows, unless and until either of
such parties notifies the other in accordance with this Section of a change of
address or change of telecopy number:
If to Attorney.: Pace Reich, Esq.
Flamm, Boroff & Bacine, P.C.
925 Harvest Drive
Suite 120
Blue Bell, PA 19422
Facsimile: (215) 239-6060
If to PVA: Mr. William M. Danton
144 Elm Street
Second Floor
Suite 16
Biddeford, ME 04005
Facsimile: (207) 286-2858
With a copy to: Harold C. Pachios, Esq.
Preti, Flaherty, Beliveau & Pachios, LLC
443 Congress Street
P.O. Box 11410
Portland, ME 04104-7410
Facsimile: (207) 791-3111
-2-
<PAGE>
7. This Agreement may be executed in several counterparts, each of
which shall be deemed an original, but such counterparts shall together
constitute but one and the same Agreement. This Agreement may be executed and
delivered in counterpart signature pages executed and delivered via facsimile
transmission, and any such counterpart executed and delivered via facsimile
transmission shall be deemed an original for all intents and purposes.
8. This Agreement shall be construed and interpreted according to the
laws of the State of Delaware without regard to the conflict of law principles
thereof.
IN WITNESS WHEREOF, the parties hereto execute this Agreement on the
day and year first above written.
______________________________ _____________________________________
Witness Pace Reich, Esq., on behalf of Flamm,
Boroff & Bacine and Clark, Ladner,
Fortenbeau & Young
PROFESSIONAL VIDEO ASSOCIATION
INC.
______________________________ By:__________________________________
Witness
Its
-3-
<PAGE>
DISTRIBUTION AGREEMENT
This Agreement, entered into this _____ day of September, 1997, by and
between VIDEO LOTTERY CONSULTANTS, INC., a Maine corporation ("VLC"), and
FORTUNE ENTERTAINMENT CORPORATION, a Bahaman corporation ("FEC").
WITNESSETH
WHEREAS, VLC is the holder of certain rights to distribute the
PVA Electronic Tournament Poker Terminal ("Terminal") and;
WHEREAS PVA has the right to sublicense its rights to distribute said
Terminals and to operate tournaments based thereon ("PVA Tournaments"); and
WHEREAS, FEC desires to obtain from VLC a sublicense of limited
duration and geographic scope with which to distribute the PVA Terminal and
operate PVA Tournaments;
NOW THEREFORE in consideration of the mutual covenants and promises
herein contained, the adequacy of which consideration is hereby acknowledged,
the Parties hereto agree as follows:
1. Grant of Right, Duration and Scope.
1.1 VLC hereby grants to FEC the exclusive right to distribute
the Terminal and operate PVA Tournaments solely in the State of California
subject to limitations contained herein.
1.2 VLC hereby grants to FEC the exclusive right to utilize
the intellectual property contained within the Terminal subject to the above
geographic restriction, including but not limited to the Terminal's, and
hardware, software, operating systems and rules and regulations of tournament
play.
1.3 FEC may not sublicense, resell, retransfer, assign,
collateralize or otherwise dispose of any rights acquired under this Agreement
to a third party without the prior written consent of VLC.
1.4 Any and all rights granted under this Agreement shall
remain in full force and effect only for a period of the earlier to occur of (1)
one hundred eighty (180) days from mutual execution of this document and (2)
termination of the Interim Agreement (as defined below) in accordance with
Section 1.2 of the Interim Agreement.
<PAGE>
2. Royalty Payments.
2.1 FEC shall pay to Professional Video Association, a Delaware
corporation ("PVA"), royalty payments as set forth in Section 2 of the Amended
Interim Distribution Agreement between PVA and VLC and attached hereto as
Exhibit A (the "Interim Agreement").
3. Breach of Contract.
3.1 Failure of either party hereunder to fulfill its
obligations herein assumed shall constitute a default under this Agreement.
Notwithstanding the generality of the foregoing, the following shall constitute
a default as to the specified party, each of which shall, if uncured as provided
below, be deemed sufficient cause for termination of this Agreement:
3.1.1 As to FEC, the failure to remit any sums due to PVA or
other parties due and owing under this Agreement;
3.1.2 As to VLC, any breach by VLC of the exclusivity of the
distribution rights and other rights granted to FEC hereunder, it being
understood and agreed that, due to the unique nature of the Terminal, the remedy
of specific performance shall be available in the event of such a breach.
3.1.3. In the event of default by either party, upon written
notice delivered by the non-defaulting party, the defaulting party shall have
thirty (30) days in which to cure such default.
4. Execution Signatures.
4.1 This Agreement may be executed in multiple counterparts,
each of which shall be deemed to be an original.
5. Integrated Agreement.
5.1 The parties hereto acknowledge that this is the entire
Agreement between them and no alterations, additions, amendments or parol
evidence thereto shall be valid.
6. Limitations.
6.1 VLC and FEC agree and understand that rights not expressly
granted in this Agreement have not been transferred by VLC to FEC. VLC retains
all ownership to the extent provided in the Interim Agreement of intellectual
property including but not limited to: trademarks, patents, copyrights, trade
dress, trade secrets and any other technical know-how or
<PAGE>
creative expression inherent in or part of the Terminal or the rules of PVA
Electronic Tournament Poker play.
6.2 FEC hereby warrants that it shall use, distribute, market
and/or present to the public the Terminal and associated trademarks in a manner
that shall present to the public the best possible reputation and assurances of
quality control. FEC hereby warrants that it will not dilute, disparage, tarnish
or otherwise diminish the value of any trademarks, trade dress, or other
intellectual property associated with the Terminal or PVA Electronic Tournament
Poker play.
6.3 FEC understands and agrees that it waives any right to
register with any regulatory agency or government body any intellectual
property, such as but not limited to copyright, trademark or patents, during or
after the license period of this agreement.
6.4 FEC hereby agrees and warrants that it will operate PVA
Electronic Tournament Poker play only in accordance with the rules and
regulations of PVA Electronic Tournament Poker play, attached hereto as
Exhibit B.
7. Governing Law.
7.1. This Agreement shall be governed and construed in
accordance with the laws of the State of Maine.
IN WITNESS THEREOF the parties hereto set their hands and seals in
their said capacities, the day and year first above written.
VIDEO LOTTERY CONSULTANTS, INC.
By: /s/ William M. Daulton
--------------------------------
Its: President
FORTUNE ENTERTAINMENT CORPORATION
By: /s/ xxxxxxxxxx
--------------------------------
Its: xxxxxxxxx
<PAGE>
AMENDED INTERIM DISTRIBUTION AGREEMENT
THIS AGREEMENT, entered into this 30th day of September, 1996, by and
between Professional Video Association, (hereinafter "PVA"), a Delaware
Corporation, and VLC, Inc., (hereinafter "VLC"), a Maine Corporation.
W I T N E S S E T H
WHEREAS, PVA is the owner of certain patents and copyrights
(hereinafter collectively "the Intellectual Property") with respect to the
Professional Video Association Tournament Terminal ("Terminal") and the play of
the game known an Professional Video Association Tournament Poker thereon; and
WHEREAS, VLC has the capacity and capability to distribute and to
license said Terminals and to operate tournaments thereon; and
WHEREAS, PVA is the debtor in possession in a proceeding commenced
pursuant to Chapter 11 of the United States Bankruptcy Code, now pending in the
United States Bankruptcy Court for the District of Delaware, Case No. 95-016
PJW; and
WHEREAS, PVA has filed a plan and disclosure statement in connection
with that proceeding; and
WHEREAS, said plan provides for, inter alia, payment of the claims of
unsecured creditor in the amount of 100% of allowed claims over time; and
WHEREAS, VLC is the sponsor of the plan filed by PVA and is the
quarantor of payments to be made under the plan; and
WHEREAS, PVA and VLC have entered into a Distribution Agreement which
is subject to approval of the Bankruptcy Court in connection with confirmation
of the proposed plan of reorganization sponsored by VLC; and
WHEREAS, Pending confirmation of the plan of reorganization, VLC has
the capability of placing and licensing Terminals in the State of California;
and
WHEREAS, PVA and VLC believe that the placing and licensing of
Terminals in the State of California will provide substantial income to PVA; and
<PAGE>
WHEREAS, the parties desires to allow VLC to place and license such
Terminals in the State at California and to protect the interest of VLC and its
licensees in the event that the court should not approve the VLC Distribution
Agreement or fail to confirm the plan of reorganization sponsored by VLC.
NOW, THEREFORE, in consideration of the mutual covenants and promises
herein contained, the adequacy of which consideration in hereby acknowledged,
the parties hereto agree as follows:
1. GRANT OF RIGHTS; DURATION
1.1 PVA hereby grants to VLC the exclusive rights to the Intellectual
Property in the State of California, including but not limited to, the
Terminals, any hardware, software, operating systems and rules and regulations
of tournament play.
1.2 This agreement shall remain in full force and effect until
terminated by order of the United States Bankruptcy Court for the District of
Delaware in Case No. 95-016PJW.
2. ROYALTY PAYMENTS
2.1 As consideration for the rights herein granted, VLC shall pay to
PVA a royalty equal to the following:
2.1.1 As to Terminals with respect to which VLC owns and directly
places such Terminals in operating locations twenty-five (25%) percent of the
"net win" of the Terminals placed by VLC, in the State of California where
"net win" equals tournament entry fees minus tournament prizes.
2.1.2 As to terminals with respect to which VLC licenses third parties
("Licensees") to place Terminals in operating locations twenty-five (25%)
percent of the "net win" as hereinabove defined plus twenty-five (25%) of the
initial gross licensing fee which initial gross licensing fee shall be not less
than four thousand nine hundred ($4,900) dollars per Terminal.
2.2 The royalty payment on net win shall be paid by VLC to PVA not less
frequently than quarterly, with payments due not more than thirty (30) days
after the end of the quarter in which earned. The royalty payment on initial
gross licensing fee shall be payable shall be paid an any portion of the gross
licensing fee within ten (10) days after receipt thereof by VLC.
3. DEFAULT; CONSTRUCTION
2
<PAGE>
3.1 The failure of either party hereunder to fulfill its obligations
herein assumed shall constitute an event of default. Notwithstanding the
generality of the foregoing, the following shall constitute events of default as
to the specified party, each of which shall, if uncured, be deemed sufficient
cause for termination of this Agreement;
3.1.1 As to VLC, the failure to remit any sums due to PVA under this
Agreement;
3.1.2 As to PVA, any breach of the exclusivity of the distribution
rights granted to VLC hereunder, it being understood and agreed that, due to the
unique nature of the Intellectual Property, the remedy of specific performance
shall be available in the event of such a breach.
3.1.3 In the event of a default by either party, upon written notice
delivered by the nondefaulting party, the defaulting party shall have thirty
(30) days in which to cure such default.
3.2 This Agreement shall be governed by and construed in accordance
with the laws of the State of Pennsylvania.
4. EXECUTION; SIGNATURES
4.1 This Agreement may be executed in multiple counterparts, each of
which shall be deemed to be an original.
4.2 It is agreed that signatures hereon transmitted by facsimile
transmission shall have the force and affect of, and shall be deemed to be,
originals.
5. CANADIAN PARTNERSHIPS
5.1 The parties hereto acknowledge that PVA has previously entered into
certain agreements with respect to the Intellectual Property with PVA
Partnership I and Software 1993 Partnership I, which are Ontario, Canada Limited
Partnerships, (hereinafter referred to as the "Canadian Partnerships"). The
parties further acknowledge that PVA's Plan of Reorganization provides for the
conditional rejection of such agreements to the extent that they are executory
contracts, and further expresses the intent of PVA to commence adversary
proceedings to determine the validity of such agreements to the extent that they
may be deemed to be nonexecutory contracts.
5.2 The parties acknowledge and agree that, to the extent that the
agreements with the Canadian Partnerships are ratified and affirmed by PVA, or
alternatively, to the extent that they are
3
<PAGE>
determined by the Bankruptcy Court or other court of competent jurisdiction to
be valid and binding agreements upon PVA, then the performance of PVA of its
obligations under said agreements shall not be deemed to be a breach of this
agreement; provided that, to the extent that the agreements with the Canadian
Partnerships reassign distribution rights to the Intellectual Property to PVA,
then the assignment of said distribution rights to VLC hereunder shall be deemed
to have been made pursuant to said agreements.
6. BANKRUPTCY COURT APPROVAL
6.1 This Agreement is subject to the approval of the United States
Bankruptcy Court for the District of Delaware in Case No. 95-016PJW. PVA shall
promptly seek approval of this Agreement.
7. SURVIVAL
7.1 In the event that this Agreement shall be terminated by Order of
the United States Bankruptcy Court for the District of Delaware in Case No.
95-016PJW, all rights and obligations of VLC and its licensees relating to all
Terminals, placed or licensed by VLC, during the term hereof shall remain in
full force and effect. VLC and its licensees shall have the right to repair
and/or replace any and all Terminals which had been placed or licensed by VLC
during the pendency of this Agreement for a period of twenty (20) years from the
date of placement or license of any such Terminals. Such rights shall continue
only so long as VLC shall continue to pay all royalty amounts due pursuant to
subparagraphs 2.1, 2.1.1 and 2.2.2 hereof.
8. INTEGRATED AGREEMENT
8.1 This in the enter Agreement between the parties and no
alterations, additions or amendments thereto shall be valid unless in writing
are signed by both parties.
IN WITNESS WHEREOF, the parties, hereto set their hands and seals, in
their said capacities, the day and year first above written.
PROFESSIONAL VIDEO VLC, INC.
ASSOCIATION, INC.
By: By: William M. Daulton
------------------------------ ----------------------
ITS: PRESIDENT ITS: PRESIDENT
4
<PAGE>
LIBRARY OF CONGRESS
-------------------
Copyright Office
of the United States
-------------------
WASHINGTON, D.C.
THIS IS TO CERTIFY that the attached photocopies are a true
representation of the work entitled PROFESSIONAL VIDEO ASSOCIATION, INCORPORATED
GAMES, RULES, DESIGNS, FORMATS & SYSTEMS deposited in the Copyright Office with
claim of copyright registered under number TXu 150-465.
IN WITNESS WHEREOF, the seal of this Office is affixed hereto on July
18, 1997.
Marybeth Peters
Register of Copyrights
By: /s/ Charles Roberts
----------------------------
Charles Roberts
Head
Certifications and
Documents
Information and Reference
Division
<PAGE>
PROFESSIONAL VIDEO ASSOCIATION, INCORPORATED
GAME, RULES, DESIGNS, FORMATS AND SYSTEMS
LIBRARY OF CONGRESS
OCTOBER 17, 1998
Copyright Office
Copyright (C)1983, By Professional Video Association, Inc.
<PAGE>
The Professional Video Association, Inc. (P.V.A.) is a Delaware
Corporation organized to elevate the standards of video play, to promote
interest in organized video competition and game activities via professional
tournaments on a local, area, state, regional, national and international level,
to protect the mutual interests of its members and associates, to establish a
Tournament Policy Board and, in effect, any other object which may be determined
from time to time by the P.V.A.
The Tournaments are designed to test the skills of video game players
from an Apprentice Professional and Master Professional status in competition
both within a player's geographical area, across the country and
internationally.
P.V.A., through advertising, education, skill-earned membership levels,
associates and employment opportunities, will promote the fact that there is a
tremendous amount of skill, timing, visual perception, to name a few, involved
in playing a video game. Much like the professionals in golf and bowling test a
golf course or a bowling alley in organized prize competition, the video game
players will compete against other qualified members of the P.V.A. while they
play P.V.A. sanctioned video machines and games
What follows is a more detailed explanation of what P.V.A., the
tournaments, its members, associates, site locations, game equipment, rules,
designs, formats and systems are about.
For the purpose of establishing local daily and weekly, monthly area,
and yearly state, regional, national and
<PAGE>
international tournaments the P.V.A. shall divide the country into local sites
progressing to areas, states, regions, national and international Tournament
Location Sites.
A Site is actually a P.V.A. Tournament Site. All such sites shall use
only P.V.A. authorized and approved tournament video games, machines and related
equipment and only paid and/or earned qualified member players may participate
in any sanctioned, authorized and/or approved tournament or sponsored event.
The following contains some definitions unique to P.V.A. applications
and terms relating to game equipment, rules, designs, formats and systems.
TOURNAMENT SITE: A sanctioned qualified tournament site is one that has been
duly licensed and accepts the rights, privileges and responsibilities to operate
as such by P.V.A., abiding by all the rules and regulations of P.V.A. This
includes the use, operation and application of only P.V.A. authorized and
approved tournament video games, machines, related equipment, formats and
systems as well as the standards for the location and condition of the site.
Each such site shall also be required to comply and execute the rules of each
tournament as set forth by P.V.A., including the awarding of prizes and the
system of operation of the tournament site.
QUALIFIED TOURNAMENT PLAYER: A tournament player is one who is of legal age to
enter any such event. Any person who is not of legal age and wishes to enter a
tournament must have the express written consent of his or her parents or
natural guardian to
2
<PAGE>
qualify to enter such tournament. A tournament player is one who pays the
required membership and entry fees for each entry in a tournament, or has earned
through his or her video skills one or more entries in a weekly tournament or
progressively higher level tournament.
EXAMPLE: Every tournament player must be a bona fide member of P.V.A. by paying
an annual $5.00 membership fee, good from January 1 through December 31 of any
calendar year. The membership card is attached to the Apprentice application of
the P.V.A. and is issued in conjunction with the player's very first daily
tournament entrance fee at any P.V.A. site. Yearly annual renewal is at the
highest skill level acquired at renewal time, and upon surrender of the previous
year's membership card.
Upon payment and issue of the P.V.A. membership card, the holder
thereof is a bona fide member for that calendar year and is entitled to enter
any tournament on a daily or weekly basis as often as he or she wishes after
paying the prescribed entrance fees. He or she must win a weekly tournament at a
P.V.A. site in order to have earned Professional Player status, which when you
win the weekly tournament at any site, the prize voucher includes your
membership card status change to Professional Player, upon the exchange or
surrender of your Apprentice membership card. This skill earned status change
from Apprentice level to Professional Player level can only be accomplished by
winning a weekly tournament at a P.V.A. site. If you win one or more daily
tournaments during a given week, you win the equal amount of daily $100.00 first
prizes and free tournament entrances into
3
<PAGE>
that weekly tournament for that week only at that site only. Progressing from
the daily tournament with a $10.00 entrance fee, competing for one $100.00 first
prize and free entrance fee to the weekly tournament at that site, any bona fide
P.V.A. member may BUY-IN to the weekly tournament with a $20.00 entrance fee
competing for a $500.00 first prize, one free entrance fee to the monthly area
tournament, and Professional Player status. The automatic elevation from the
Apprentice level to the earned skill level of Professional video player enables
you to enjoy all the privileges of Apprentice status and give you the
opportunity to BUY-IN to any monthly area tournament. You must have won a weekly
tournament at any P.V.A. site to compete in any area monthly tournament. The
weekly tournament winner in a given area automatically entitles you to one free
entrance fee to that monthly area tournament. Any bona fide P.V.A. player who
has through his skill earned his or her Professional status may BUY-IN any
monthly area tournament for $50.00 tournament entrance fee, competing for a
$2,500.00 first prize, $1,000.00 second prize and $500.00 third prize. All three
winners of any monthly area tournament are elevated to Master Professional
Player only first place wins free entrance to that State Tournament, and any
Master Professional may BUY-IN any state wide tournament in the U.S.A. for a
$100.00 entrance fee, with proof of a Master Professional status in good
standing.
The national tournaments are limited to one free entrance for each
state champion and a $1,000.00 BUY-IN for P.V.A. Master Professionals in good
standing. Special or International Tournaments held at various times will be by
invitation only and prizes and fees will be set by P.V.A.
4
<PAGE>
third in a monthly area tournament at a P.V.A. site. Limited only to entrance in
Invitational or Special Event P.V.A. competition.
BUY-IN: This applies to a sum of money paid as entrance fee to a P.V.A.
tournament. Different tournaments have different monetary entrance fees, and
different membership level qualifications.
BUY-IN FEES:
Tournament Fee Membership Status Required
- - ---------- --- --------------------------
Daily $10.00 Apprentice, Professional and
Master Professional
Weekly $20.00 Apprentice, Professional and
Master Professional
Area $50.00 Professional & Master Professional
State $100.00 Master Professional Status only
National $1,000.00 Master Professional Status only
Invitational Set by Master Professional Status with
or Special P.V.A. Invitation or P.V.A. exception
Events
Example: Apprentice membership cannot BUY-IN to a monthly area tournament. He or
she must have attained the Professional status by first winning a weekly
tournament at a P.V.A. site. A Master Professional may BUY-IN to any and all
tournaments by paying the monetary entrance fee and hold membership in good
standing with the P.V.A. The only exceptions being Invitational or Special Event
P.V.A. Tournaments.
TOURNAMENT POLICY BOARD: Each local area will have a Tournament Policy Board to
act and execute with authority under the direction of the P.V.A. in matters of
policy and mutual interest.
6
<PAGE>
The Board will be appointed by the P.V.A. The P.V.A. will, at all times, have
the final authority.
ASSOCIATES: Any and all persons in direct or indirect employment or contract
with mutual interest in the P.V.A.
CURRENT SCHEDULE OF PRIZES:
Tournament Prize
- - ---------- -----
Daily One $100.00 prize and one free entrance for that
weekly tournament at that P.V.A. site.
Weekly One $500.00 prize and free entrance to the monthly
area tournament, with automatic elevation to
Professional membership status. Apprentice
membership card must be exchanged for the
Professional membership card at the time of prize
collection.
Monthly Area THREE PRIZES ARE AWARDED:
First Prize: $2,500.00 and one free entrance fee
to the State Tournament, with elevation to the
Master Professional status. Winners Professional
card must be exchanged for Master Professional
membership card at prize collection time.
Second Prize: $1,000.00 and elevation to Master
Professional. Winners Professional card must be
exchanged for Master Professional membership card
at prize collection time. (No free entrance fee to
State Tournament, BUY-IN $100.00)
Third Prize: $500.00 and elevation to Master
Professional. Winners Professional card must be
exchanged for Master Professional membership card
at prize collection time. (No free entrance fee to
State Tournament, BUY-IN, $100.00)
State THREE PRIZES ARE AWARDED:
Tournaments
First Prize: $10,000.00 and one free entrance fee
to the National Tournament. State Champion Trophy
and expenses to the National Tournament.
Second Prize: $5,000.00 and Trophy.
7
<PAGE>
Third Prize: $1,000.00 and Trophy.
Regional, Prizes and Schedules along with qualifications will
National, be set by P.V.A,
International
and Special Events
MEMBERSHIP CARDS:
Apprentice Card Color is red with white letters
Professional Card Color is white with blue letters
Master Professional Card Color is blue with gold letters
SAMPLE P.V.A. MEMBERSHIP CARD:
This card acknowledges that the holder hereof is a bona fide member of the
Professional Video Association, Incorporated, P.V.A., for that calendar year,
and is entitled, upon payment of membership dues, to compete in P.V.A. sponsored
Tournaments on the Apprentice level in daily and weekly tournaments. This card
is non-transferable. It may be revoked at any time by the P.V.A.
Date ___________________ Signature _________________________
Separate cards with different colors for Professional and Master Professional
status will be issued with a separate clause for yearly renewal to maintain the
earned skill level acquired.
LOGO
The three (3) letters P V A
Thirteen (13) lines forming each letter, equally spaced and
sized (see enclosure)
8
<PAGE>
Operation of the Tournament:
Each tournament site shall be required to operate a tournament on a
daily and weekly basis and to award a set amount of money for the daily
tournament (one first prize of $100.00) and a weekly tournament (one first prize
of $500.00). These amounts are to be set exclusively by the P.V.A. The amount to
be charged as an entrance fee for each tournament and fee for membership shall
be established exclusively by the P.V.A. also. The Tournament Players are
required to be bona fide non-voting members of the P.V.A. who are required to
pay an annual membership fee, good from January 1 through December 31 of any
calendar year. The Membership Card is attached to the very first daily
tournament entrance fee application and is one of the three levels of membership
status available.
1. Apprentice Membership is the initial non-voting membership in
the P.V.A.
2. Professional Membership is the second, non-voting membership
level that can ONLY BE EARNED through the players' skill of
winning a weekly tournament at a P.V.A. tournament site.
3. Master Professional is the third, non-voting membership level
that can ONLY BE EARNED through the players' skill of winning an
area monthly tournament.
Progression from Apprentice through the second and third levels of membership in
P.V.A. can only be acquired through a player's skill.
Membership progression through the three levels requires the following:
At each level of membership progression, upon collection of the prize, the
membership elevation to the next status level is complete when the lower level
membership card is
9
<PAGE>
exchanged for the new membership card. At that time, the member player is
entitled to his or her BUY-IN privileges at that particular tournament level.
Never, at any time, is membership or the membership card transferable.
All membership fees are the exclusive income of P.V.A. To ensure that all prize
money will be available for each tournament and prize period, the individual
sites must make deposits in advance with P.V.A. of any and all prize money to be
awarded to the players and fee to be paid to P.V.A. for conducting the area,
regional, state and national tournaments. These advance deposits are to be based
on a minimum number of tournament players for each daily and weekly tournament,
regardless of the actual number of players on any given day or week. In the
event there are less actual tournament players than the established minimum,
then that cost is the cost of that tournament site. In addition, P.V.A. shall be
entitled to a percentage of the amount received by the tournament site for each
and every participant over the minimum established for each site by the P.V.A.
The system for ensuring such deposits and payments and prize vouchers shall be
established by the P.V.A. Such system shall be the exclusive property of the
P.V.A. and may be modified from time to time by the P.V.A.
Summary of the Tournament Set Up:
Each tournament site must conduct, under the standards established by
the P.V.A., a daily tournament and a weekly tournament. A minimum of five (5)
daily and a maximum of six (6) daily tournaments with one day set aside as the
weekly day of
10
<PAGE>
that site's weekly tournament. The number of daily tournaments are not to
conflict with local Sunday laws concerning business operation.
All tournaments held at the P.V.A. sites are to take place using ONLY
the approved P.V.A. Tournament Video Machines and/or Games. These tournaments
are to consist of daily monetary prizes ($100.00 first prize) for the best
performance by a bona fide member of P.V.A., on the day of that particular
tournament, at each site. All members in good standing who pay their entrance
fee for the daily tournament compete to place first that day and win $100.00
monetary prize and free entrance to that weekly tournament at that site
location. If he or she wins the weekly tournament, they win $500.00 and one free
entrance to the monthly area tournament. If the member is only at Apprentice
level of membership, he or she progresses to the Professional status. Any member
in good standing may BUY-IN ($20.00) to the weekly tournament at any P.V.A.
site.
The winner of the weekly (first prize), because of his skill,
progresses to the second level of membership in P.V.A.-Professional. He or she
wins free entrance to the monthly area tournament, in addition to the $500.00
first prize. Any Professional (second level membership) and Master Professional
(third level membership) may BUY-IN to the monthly area tournament ($50.00). NO
APPRENTICE may BUY-IN to any tournament beyond the weekly tournaments. All
members must earn, through skill, their second and third level Professional
status. You may only advance in membership level after you have earned and
exchanged the lower status membership card for the new membership card.
11
<PAGE>
The Professional member must win, or place second or third in a
monthly tournament to acquire the Master Professional Level of membership in
P.V.A. Only a Master Professional may win or use BUY-IN privileges in a state,
regional or national tournament.
Example of Membership Progression through P.V.A.:
Apprentice: Any person of legal age or consent can only acquire P.V.A.
membership at the very first entrance to a daily P.V.A. tournament. He or she
pays a $5.00 annual membership fee and the $10.00 entrance fee to that daily
tournament.
The winner of a daily tournament wins $100.00 first prize and free
entrance to that weekly tournament at that site. He or she may win as many daily
contests as he or she can. They may win as many as six free entrance fees for
any one weekly tournament.
The first place winner of a weekly tournament wins $500.00 and free
entrance to the monthly area tournament with the membership status change to
Professional.
Apprentices may BUY-IN only to the weekly tournaments ($20.00).
Apprentices must win a weekly tournament at a P.V.A. site to earn BUY-IN
privileges or advancement to P.V.A. tournaments beyond the weekly tournament.
Professional Membership: Professional membership enjoys all of the Apprentice
rights and benefits, and because he or she has demonstrated his or her skill to
win a weekly tournament, he or
12
<PAGE>
she is elevated to the Professional status. When the member player won the
weekly tournament, he wins first prize of $500.00 plus he must exchange his
Apprentice membership card at the time he collects his voucher, which includes
the Professional membership card. He also wins free entrance fee to the monthly
area tournament, which information is included on the P.V.A. voucher. In
addition, he has the rights to BUY-IN to any tournament up to and including any
monthly area tournament ($50.00 BUY-IN fee) as long as his or her membership is
in good standing.
Master Professional: Enjoys all the rights, privileges and benefits of both
Apprentice and Professional and is the highest membership level that can only be
attained by winning first, second or third prize in the monthly area tournament.
The first prize winner wins $2,500.00, free entrance fee to the State
Championship and elevation to Master Professional. When he exchanges his
Professional membership card for the Master Professional membership card, the
prize, membership card along with the free entrance fee to the State
Championship, are included on the P.V.A. voucher. The second prize winner
receives $1,000.00 and membership elevation to Master Professional. (NO free
entrance fee to State Championship. However, with his or her newly acquired
Master Professional card, they have the privilege to BUY-IN to any and all state
championships for $100.00 entrance fee, and the National Championship for
$1,000.00 as long as membership is in good standing.) The third prize winner
receives $500.00 and membership to Master Professional. (Same BUY-IN privileges
as second prize winner.)
13
<PAGE>
The P.V.A. voucher system is a unique part of the prepaid prize and/or
free entrance system used for P.V.A, membership card exchange, winners, monetary
payments, and applicable membership status elevation.
The P.V.A. has the exclusive rights, the authority and the final
determination for any and all tournaments, site locations, the number of and
scheduling of, from the daily through the National, International and Special
Event Tournaments.
IN SUMMARY:
The P.V.A. as an organization is designed for the purpose of promoting
fair tournament play, as well as other video game activities. These would
include clinics, educational demonstrations on the play of the video games,
advertising, employment opportunities, organizational non-voting membership,
individual competition and team competition, etc. Additionally, the P.V.A.
believes that the talent involved in playing any video game should be recognized
as such. It is thought by many people that video games are merely entertainment
and diversion. Much like tennis, bowling, golf and other sports, there are many
elements of skill present when one plays a video game. By establishing
qualifying tournaments across the country, as well as a uniform system of video
games and machines, the P.V.A. will attempt to show and exemplify the skills of
players from the Apprentice to the Master Professional levels throughout the
country to the people across the country and beyond.
14
<PAGE>
This document submitted for copyright: September _________, 1983
15
<PAGE>
Video Lottery Consultants, Inc.
144 Elm Street, 2nd Floor
Suite 16
Biddeford, Maine 04005
January 27, 1998
Fortune Entertainment Corporation
Suite 303-543 Granville Street
Vancouver, B.C.
V6C 1X8
Attention: Mr. David Jackson
Dear Sirs:
Re: Purchase and Sale Agreement (the "Agreement") dated September 5, 1997
among Fortune Entertainment Corporation (a Bahamas corporation) ("FEC"),
Video Lottery Consultants, Inc. (a Maine corporation) ("VLC") and
William M. Danton ("Mr. Danton", together, the "Danton Group")
The undersigned acknowledge that certain payments or other events which were to
occur by certain dates specified in the Agreement, did not occur.
The undersigned also acknowledge that on October 14, 1997, FEC entered into a
reverse acquisition (the "Reverse Acquisition") with Fortune Entertainment
Corporation (Delaware) ("FEC Delaware"), pursuant to which FEC Delaware acquired
all of the issued and outstanding shares of FEC.
The undersigned agree to reinstate the Agreement, subject to the following
modifications:
1. FEC confirms its assumption of obligations specified in paragraph 2.1(d)
of the Agreement and acknowledges that as of January 22, 1998 the amount
due thereunder is U.S.$4,780;
2. The undersigned agree that FEC's obligation to issue stock under paragraph
2.2(a) of the Agreement is hereby extended from within seven (7) days of
the issuance and delivery to FEC of the Court Order (as defined in the
Agreement, which definition is incorporated herein) to on or before
February 13, 1998. The undersigned also acknowledge and agree that as a
consequence of the Reverse Acquisition, the stock to be issued under
paragraph 2.2(a) will be 400,000 shares of common stock of FEC Delaware,
in lieu of 1,000,000 shares of FEC;
3. The undersigned agree that the payment by FEC pursuant to paragraph
2.2(b)(i) of the Agreement is hereby postponed to on or before
February 13, 1998;
<PAGE>
4. The undersigned agree that the payment by FEC of U.S.$200,000 that was
under paragraph 2.2(d) of the Agreement on December 18, 1997 is hereby
postponed until on or before February 13, 1998; and
5. FEC agrees to assume, from and after the Court Order, interest payments
on two bank loans totalling U.S.$50,000 (the "Loans"), which interest
shall not exceed U.S.$1,135 per month, and which interest totals
U.S.$2,270 as of January 22, 1998. Mr. Danton agrees to repay the Loans
out of the payment he receives pursuant to paragraph 2.2(b)(i) of the
Agreement.
Except as modified by the above, the undersigned agree that the Agreement is
unmodified and remains in full force and effect.
Mr. Danton, on behalf of himself and the Danton Group, agrees not to make any
claims or demands on FEC, whether under the Initial Promissory Note (as defined
in the Agreement, which definition is incorporated herein by reference) or
otherwise, that would be inconsistent with the foregoing, provided that FEC
timely performs its obligations hereunder.
Please acknowledge your agreement to the foregoing by endorsing this letter in
the space provided below and returning same to us. This letter agreement may be
executed in counterpart and by facsimile.
Yours truly,
/s/ William M. Danton
- - -------------------------------
WILLIAM M. DANTON, on behalf of
himself and the Danton Group
Acknowledged and agreed to by
FORTUNE ENTERTAINMENT CORPORATION,
a Bahamas corporation
per: /s/ David Jackson
--------------------------
David Jackson
<PAGE>
Video Lottery Consultants, Inc.
144 Elm Street, 2nd Floor
Suite 16
Biddeford, Maine 04005
January 29, 1998
Fortune Entertainment Corporation
Suite 303-543 Granville Street
Vancouver, B.C.
V6C 1X8
Attention: Mr. David Jackson
Dear Sirs:
Re: Purchase and Sale Agreement (the ("Agreement") dated September 5, 1997
and amended on January 27, 1998 among Fortune Entertainment Corporation
(a Bahamas corporation) ("FEC"), Video Lottery Consultants, Inc. (a Maine
corporation) ("VLC") and William M. Danton ("Mr. Danton", together, the
"Danton Group")
We are writing this letter to confirm that the reference to Professional Video
Associates, Inc. in the Agreement should have been a reference to Professional
Video Association, Inc. Please confirm that the Agreement is hereby amended by
deleting the reference to Professional Video Associates, Inc. and replacing it
with a reference to Professional Video Association, Inc. by endorsing this
letter in the space provided below and returning same to us.
Yours truly,
/s/ William M. Danton
- - -------------------------------
WILLIAM M. DANTON, on behalf of
himself and the Danton Group
Acknowledged and agreed to by
FORTUNE ENTERTAINMENT CORPORATION,
a Bahamas corporation
per: /s/ David Jackson
--------------------------
David Jackson
<PAGE>
Video Lottery Consultants, Inc.
144 Elm Street, 2nd Floor
Suite 16
Biddeford, Maine 04005
March 12, 1998
Fortune Entertainment Corporation
Suite 303-543 Granville Street
Vancouver, B.C. V6C 1X8
Attention: Mr. David Jackson
Dear Sirs:
Re: Purchase and Sale Agreement (the "Original Agreement") dated
September 5, 1997 as amended on January 27 and January 29, 1998 (the
Original Agreement as amended is hereinafter referred to as the the
"Agreement") among Fortune Entertainment Corporation (a Bahamas
corporation) ("FEC"), Video Lottery Consultants, Inc. (a Maine
corporation) ("VLC") and William M. Danton ("Mr. Danton", together, the
"Danton Group")
The undersigned acknowledge that certain payments or other events which were to
occur by certain dates specified in the Agreement, did not occur.
The undersigned agree to reinstate the Agreement, subject to the following
modifications:
1. The undersigned agree that FEC shall satisfy its obligations under
paragraph 2.2(a) of the Agreement by delivering 505,000 shares of common
stock of FEC Delaware to Mr. Danton by March 20, 1998.
2. FEC will pay to Mr. Danton U.S.$155,000 (the "FEC Funds") by
March 19, 1998
3. Mr. Danton covenants and agrees with FEC that upon receipt of the FEC
Funds by Mr. Danton, Mr. Danton shall immediately use the FEC Funds
together with his own resources to:
(a) establish an irrevocable letter of credit in favour of Reich &
Mueller, escrow account in the form attached hereto as Schedule
"A" and in the amount of U.S.$194,914.45; and
(b) satisfy all obligations to Amusement World, Inc., Stephen D.
Holniker, H. Richard Falck and Lois Falck secured by a standby
letter of credit ("SLC") dated May 1, 1997 issued by Saco &
Biddeford Savings Institution in the amount of U.S.$100,000.
4. Mr. Danton covenants and agrees to deliver to FEC by March 12, 1998 an
opinion letter from Pace Reich in the form attached hereto as Schedule "B"
or such other form as may be approved by counsel for FEC.
5. Mr. Danton covenants, confirms and represents and warrants to FEC that:
(a) FVA does not have any liabilities, other than liabilities arising
under the Horan Agreement;
<PAGE>
(b) upon compliance with paragraph 3 hereof by Mr. Danton, FEC shall
have transferred to it by VLC title to 28 model 734 Video Game
Terminals which are the subject of the SLC, free and clear of all
liens and encumbrances; and
(c) all of the representations and warranties of the Denton Group
contained in the Agreement are true and correct as at the date
hereof.
6. The undersigned agree that the payment by FEC pursuant to (a) paragraph
2.2(b)(i) of the Agreement is hereby postponed to May 31, 1998; and
(b) paragraph 2.2(b)(ii) of the Agreement is hereby postponed to
August 31, 1998.
7. The undersigned agree that the payment to Mr. Danton of $200,000 under
paragraph 2.2(d)(i) of the Agreement is hereby postponed to
August 31, 1998.
8. FEC shall reimburse Mr. Danton for $195,000 on December 31, 1998.
9. FEC acknowledges and agrees that it is using, and shall continue to use,
its best efforts to make FEC Delaware a publicly owned and traded
company.
10. Time is of the essence of the Agreement, as hereby amended.
Unless modified by the foregoing, the definitions used in the Agreement apply
herein.
Except as modified by the above, the undersigned agree that the Agreement is
unmodified and remains in full force and effect.
Mr. Danton, on behalf of himself and the Danton Group, agrees not to make any
claims or demands on FEC, whether under the Initial Promissory Notes (as defined
in the Agreement, which definition is incorporated herein by reference) or
otherwise, that would be inconsistent with the foregoing.
Please acknowledge your agreement to the foregoing by endorsing this letter in
the space provided below and returning same to us. This letter agreement may be
executed in counterpart and by facsimile.
Yours truly,
/s/ William M. Danton
- - -------------------------------
WILLIAM M. DANTON, on behalf of
himself and the Danton Group
Acknowledged and agreed to by
FORTUNE ENTERTAINMENT CORPORATION,
a Bahamas corporation
per: /s/ David Jackson
--------------------------
David Jackson
<PAGE>
Video Lottery Consultants, Inc.
144 Elm Street, 2nd Floor
Suite 16
Biddeford, Maine 04005
July 9, 1998
David Jackson, President
Fortune Entertainment Corporation,
a Bahama corporation
Fortune Entertainment Corporation,
a Delaware corporation
Suite 303-543 Granville Street
Vancouver, B.C.
V6C IX8
Re: Professional Video Association, Inc.
Dear David:
Reference is made to the Purchase and Sale Agreement, dated September 5,
1997 (the "Original Agreement"), as amended on January 27, 1998, January 29,
1998, and March 12, 1998 (the "Original Agreement, as amended, the "Agreement").
In consideration of our agreement to modify your payment schedule under the
Agreement, Fortune Entertainment Corporation, a Bahama corporation ("FECB"), and
Fortune Entertainment Corporation, a Delaware corporation ("FECD") each hereby
agree as follows:
1. FECB hereby represents and warrants that FECB owns all of the right,
title and interest of "FEC" (as defined in the Agreement) in and to the
Agreement, and, except as hereinafter set forth, FECB has not assigned or
otherwise transferred any of its right, title and interest, nor its obligations,
thereunder.
2. For value received and in order to induce the Danton Group to enter into
this amendment, FECD hereby unconditionally guaranties to the Danton Group the
prompt payment and performance of all of FECB's obligations under the Agreement,
as amended from time to time. FECD further agrees to be bound by the provision
of the Agreement, as amended from time to time, either specifically imposing
any obligation on FECD or otherwise requiring the issuance of FEC Stock and the
top-up provisions (as defined below).
3. FECD and FECB hereby acknowledge and agree that all of the Danton
Group's obligations under Section 2.1(a) of the Agreement have been satisfied
in all respects.
1
<PAGE>
4. FECB has satisfied its obligations under paragraph 2.2(a) of the
Agreement in all respects.
5. The Agreement, among FECB, William M. Danton and Video Lottery
Consultants, Inc. is hereby amended as follows:
A. Article I of the Agreement is hereby amended as follows:
The following definitions are hereby deleted in their entity and
replaced with the following, inserted in the appropriate alphabetical
order:
"Closing Date" shall have the meaning set forth in Section 2.2(d).
"FEC Stock" shall mean the common stock of FECD, with a par value of
$0.0001 per share, with full voting rights and dividends rights, which
stock is currently publicly traded on the OTC Bulletin Board."
B. Section 2.2(a) of the Agreement is hereby amended by deleting the second
sentence thereof in its entirety and replacing it with the following:
"The parties acknowledge and agree that so long as FECB and FECD are not
collectively or individually in default under the Agreement, as amended
from time to time, then the FEC Stock delivered to Mr. Danton or his
designee pursuant to this Agreement will be subject to a voting trust
agreement on substantially the terms described in Exhibit E hereto."
C. Sections 2.2(b), 2.2(c) and 2.2(d) of the Agreement are hereby deleted
in their entirety and replaced by the following:
"(b) FECD shall immediately (but no event later than July 14, 1998)
deliver to W.W.T.&T. LTD., 995,000 shares of FEC Stock (the "W Stock"),
which W Stock shall (i) be validly issued and nonassessable and (ii) be the
subject of a registration statement to be filed with the Securities and
Exchange Commission, a copy of which shall immediately after filing be
delivered to the Danton Group, which registration statement shall cause the
W Stock to be fully registered under the Securities Act of 1933 as amended,
and freely transferable and not subject to restrictions on transferability
of any kind whatsoever by February 28, 1999. In addition, no later than
February 28, 1999, FECD shall cause the 470,000 shares of FEC Stock
previously delivered to Anastasia Danton and now held by W.W.T.&T. LTD.
(the "A Stock"), the 35,000 shares of FEC Stock previously delivered to
Theodore Silvester, and the Additional Stock (as hereinafter defined) to be
fully registered under the Securities Act of 1933 as amended and freely
transferable without any restrictions on transferability whatsoever.
2
<PAGE>
If during the period commencing on the date (the "Trading Date") when
all of the W Stock, the A Stock and the Additional Stock (collectively, the
"Danton Stock") is fully registered under the Securities Act of 1933 as amended,
and freely transferable and not subject to restrictions on transferability of
any kind whatsoever, and ending on a date sixty (60) days after the Trading Date
(the "60th Day") the shares of FEC Stock trading on the OTC Bulletin Board (the
"Board") have not for forty-five (45) days had a closing bid price per share of
at least US$2.00 on the Board, then, to the extent that the Danton Stock is held
on the 60th Day by the original holders of the Danton Stock or their respective
family members or affiliates, FECD shall pay to such holder or holders of the
Danton Stock, or any portion thereof, for each such share of FEC Stock, the
difference between (A) US$2.00; and (B) the greater of US$0.50 and the average
bid closing price of shares of FEC Stock trading on the Board for the ten (10)
days preceding the 60th Day (the "Average Price"). This obligation of FECD shall
apply regardless of any transfers of the Danton Stock to any original holder's
family members or affiliates. FECD shall pay such difference on or before June
9, 1999 in cash or, at FECD's option, in FEC Stock. FECD shall cause such stock
to be fully registered under the Securities Act of 1933 as amended and freely
transferable with no restrictions on transferability of any kind whatsoever
within 180 days of issuance of any FEC Stock pursuant to this paragraph. If FECD
elects to issue such FEC Stock for the difference, the number of shares of FEC
Stock to be issued shall be determined by dividing the difference determined in
this paragraph by the Average Price. The provisions of this paragraph shall be
referred to as the "top-up provisions".
If FECD fails to timely comply with any of its obligations under this
Section 2.2(b), the Danton Group shall have the right, at its option, but
subject to Section 5.10, to terminate the Agreement, as amended from time to
time, exercise all of its rights and remedies under both or either of the Option
Agreement (as hereinafter defined) or Pledge Agreement (as hereinafter defined)
and immediately terminate the Agreement as amended from time to time, at which
time the Danton Group's obligations under the Agreement, as amended from time to
time, shall be null and void, and the Agreement, as amended from time to time,
shall be of no further force and effect.
(c) Concurrently with the delivery of the W Stock pursuant to
Section 2.2(b) above (such date being hereinafter referred to as the "Transfer
Date"), the Danton Group shall deliver (I) to FECB one hundred percent (100%) of
the issued and outstanding PVA Stock, free and clear of all liens and
encumbrances (other than the liens and encumbrances created by the Pledge
Agreement and the Option Agreement as described below) duly endorsed in blank or
accompanied by executed stock powers and otherwise in form for transfer, (II)
transfer to FECB the debt owed by PVA to the Danton Group, (III) assign to FECB
its rights under the Manufacturing Agreement and the Software Release (and FECB
shall assume
3
<PAGE>
all of the Danton Group's liabilities and responsibilities thereunder), (IV)
deliver any rights, documents, papers, files (whether paper or electronic) and
other materials in the Danton Group's possession or control related to PVA and
the Intellectual Property by a document or documents in form and substance
reasonably acceptable to FECB and the Danton Group, and (V) deliver to FECB all
instruments and other agreements evidencing the transfer to FECB of the Danton
Group's rights in and to the Assets. Concurrently with the delivery of 100% of
the PVA Stock, FECB will enter into (A) a stock pledge agreement (the "Pledge
Agreement") with Mr. Danton or his designee pursuant to which Mr. Danton or his
designee is granted a security interest in 60% of the issued and outstanding PVA
Stock (the "Pledged Stock"), on the terms and conditions described in Exhibit G
hereto and (B) an option agreement (the "Option Agreement") with Mr. Danton or
his designee, thereby granting to Mr. Danton or his designee an option to
purchase the 40% of the issued and outstanding PVA Stock that is not subject to
the Pledge Agreement (the "Option Stock"), which Option Agreement shall contain
those terms and conditions described on Exhibit G-1 hereto and other provisions
not inconsistent with the terms of this Agreement. In addition, the Danton Group
shall cause the Interim Agreement to be terminated.
(d) FECD shall make the following payments to Mr. Danton or his
designee in immediately available funds to the account previously designated to
FECD by Mr. Danton:
US$170,000 on or before June 30, 1998, which Mr. Danton acknowledges
receipt;
US$250,000 on or before October 30, 1998;
US$250,000 on or before December 30, 1998; and
US$205,000 on or before March 30, 1999.
On or before December 31, 1998 and with ten (10) days prior written
notice to the Danton Group, FECD may pre-pay in whole, and not in part, all of
the above payments for which the due date has not yet passed, without bonus or
penalty, at a discount rate of five percent (5%).
If any payment under this Section 2.2(d) is not made on or before the
date designated above, the Danton Group shall have the right, at its option
exercisable at any time after the default, but subject to Section 5.10 to
terminate the Agreement, as amended from time, exercise all of its rights and
remedies under both or either of the Option Agreement or Pledge Agreement, and
to terminate the Agreement, as amended from time to time, at which time the
Danton Group's obligations hereunder shall be null and void, and the Agreement,
as amended from time to time, shall be of no further force and effect.
4
<PAGE>
Upon FECD's timely satisfaction of its obligations under Section
2.2(b), Section 2.2(d), Section 2.2(h) and the first two sentences of Section
2.2(i) of the Agreement, as amended from time to time, and the registration
under the Securities Act of 1933 as amended of all Danton Stock so that all such
stock is fully registered under the Securities Act of 1933, as amended and is
freely transferable without any restrictions of any kind whatsoever (the date
upon which all such obligations are satisfied is hereinafter referred to as the
"Closing Date"), (I) Mr. Danton shall deliver to FECB the Pledged Stock, free
and clear of all liens and encumbrances, duly endorsed in blank or accompanied
by executed blank stock powers and otherwise in form for transfer, and (II) the
Danton Group shall cause the Option Agreement and the Pledge Agreement to be
terminated.
D. Section 2.2(e) of the Agreement shall be amended as follows:
(1) The introductory paragraph and first sentence of Section 2.2(e)
shall be deleted in their entirety and replaced with the following:
"One hundred twenty (120) days after the completion of FECD's first fiscal year
ending after November 25, 1997 (such day being one hundred twenty (120) days
after FECD's first fiscal year is hereinafter referred to as the "Trigger Date")
and continuing on the annual anniversary of the Trigger Date each and every year
thereafter during either (i) the term of the life of the patent (the "Patent")
comprising a part of the Intellectual Property and any renewals or other
extensions thereof or (ii) any extension of the Patent resulting from any
modifications or derivatives thereof, FECD (or its successor) shall issue FEC
Stock, to Mr. Danton or his designee as follows:
The number of shares to be delivered on the annual anniversary of the
Trigger Date purusant to this paragraph (e) shall equal the Predetermined
Percentage times Net Earnings divided by the Average Share Price."
(2) The definition of "Predetermined Percentage" in Section 2.2(e)
shall be delted in its entirety and replaced with the following:
"Year 1 2%
Year 2 3%
Year 3 4%
Year 4 5%
Year 5 and thereafter 10%
5
<PAGE>
provided that the Predetermined Percentage shall automatically increase to
10% once Net Earnings are at least $10 million. "Year 1" commenced on November
25, 1997."
Within 180 days of issuance of ay FEC Stock pursuant this paragraph,
FECD shall cause such stock to be fully registered under the Securities Act of
1933 as amended and freely transferable without any restrictions whatsoever on
transferabilit (or other interest of any successor entity to FECD that has full
voting and dividend rights and is registered under the Securities Act of 1933 as
amended, and is freely transferable.)
(3) The last paragraph of Section 2.2(e) shall be deleted in its
entirety.
E. A new section 2.2(h) is hereby added to the Agreement as follows:
"(h) FECD shall deliver to Mr. Danton, on or before July 14, 1998,
certificates for FEC Stock (the "Additional Stock") naming the
following individuals as owners and indicating the number of shares
set forth below, which FEC Stock shall be subject to the top-up
provisions:
Stephen Holniker of Maryland 37,500
Richard and Lois Falck of Maryland 10,000
Neil Glassman of Delaware 70,000
Steven Angstreich of Pennsylvania 30,000
F. A new Section 2.2(i) is hereby added to the Agreement as follows:
"(i) FECD hereby assumes and agrees to pay all reasonable costs and
expenses (including attorneys' fees) (the "Expenses") incurred by any
of the Danton Group after November 25, 1997 up to and including the
date hereof related to the Agreement, all amendments thereto, in
connection with the transactions contemplated thereby and otherwise
incurred in connection with PVA Electronic Tournament Poker or PVA;
provided, however, that FECD assumes and agrees to pay the attorneys'
fees of Preti, Flaherty, Beliveau & Pachios incurred by the Danton
Group after November 25, 1997 up to and including the date hereof up
to a maximum of $25,000. Within 120 days from the date of this
amendment, FECD shall pay to the Danton Group, or its designee, all
Expenses incurred by the Danton Group to and including the date
thereof, provided that the Danton Group or any member thereof has
provided FECD with reasonable documentation thereof. In addition, FECD
assumes and agrees to pay or otherwise indemnify and hold harmless the
Danton Group and PVA from and against any and all claims, liabilities,
or obligations arising or incurred from and after November 25, 1997
that are in any way related to PVA or its assets. Thereafter, the
Danton Group or any member thereof shall provide FECD with monthly
6
<PAGE>
statements providing reasonable detail and documentation of the
Expenses incurred by the Danton Group. All such Expenses shall be
reasonable and pre-approved by FECD. FECD shall pay all such statements
within 20 days of the date of any such statement."
G. Sections 4.2(a) and 4.2(d) are hereby deleted in their entirety.
Sections 4.2(b) and 4.2(c) continue to be in full force and effect.
H. The first sentence of Section 5.3 of the Agreement is deleted and the
following inserted in its place:
"This Agreement, as amended from time to time, shall be binding upon
and shall be enforceable by FECB, FECD and the Danton Group and their
respective successors and assigns. For purposes of this Agreement,
"successors and assigns" shall includ but not be limited to the
purchaser of all or substantially all of the Assets of FECD and/or
the PVA Stock and/or the Assets, or the surviving corporation of any
consolidation of FECD."
I. A new Section 5.10 is hereby added to the Agreement as follows:
"Section 5.10 Defaults. In the event that FECB or FECD defaults in any
of its obligations under the Agreement, as amended from time to time
(other than obligations pursuant to Section 2.2(b)), which default is
not cured within sixty (60) days of the date any member of the Danton
Group provides written notice to FECD of such default, the Danton Group
shall have the right, at its option exercisable at any time after the
60 day period, to terminate the Agreement as amended from time to time
and to exercise all of its rights and remedies under the Option
Agreement and Pledge Agreement, and all of its rights and remedies
under law and equity, and terminate the Agreement as amended from time
to time, at which time the Danton Group's obligations hereunder shall
be null and void, and the Agreement, as amended from time to time,
shall be of no further force and effect. With respect to a default of
the obligations pursuant to Section 2.2(b), there shall be no cure
period, and the Danton Group shall have the right, at its option
exercisable immediately after such default, to terminate the Agreement
as amended from time to time and to exercise all of its rights and
remedies under the Option Agreement and Pledge Agreement, and all of
its rights and remedies under law and equity, and terminate the
Agreement as amended from time to time, at which time the Danton
Group's obligations hereunder shall be null and void, and the
Agreement, as amended from time to time, shall vbe of no further force
and effect.
7
<PAGE>
J. The contents of Exhibit D are hereby deleted in their entirety.
Exhibit G to the Agreement is hereby deleted in its entirety and
replaced with Exhibit G and Exhibit G-1 attached hereto.
6. FECD and FECB each hereby represent and warrant that they are
corporations, validly existing and in good standing in the jurisdiction of their
respective incorporation, that this amendment has been duly authorized by all
necessary corporate action on behalf of each company, has been executed by a
duly authorized officer of each of FECD and FECB, and that no other consents or
approvals are required in connection with the execution, delivery and
performance of their respective obligations hereunder.
7. The Danton Group agrees to advise FECD in writing by facsimile
at least 5 days in advance of any intended sale of W Stock or A Stock which
exceeds 5,000 shares in any 7 day period, except for sales to family members or
affiliates; provided, however, that any such family member for affiliate shall
first consent in writing to be bound by this provision. This paragraph 7 shall
not apply in the event there is a change in control of FECD or FECB, including,
without limitation, a sale, merger, or stock exchange. In any event, this
paragraph 7 shall not apply after July 1, 1999 and shall thereafter be void and
of no effect.
8. Except as expressly amended hereunder, the Agreement remains
otherwise unmodified and in full force and effect, and, together with this
amendment, is enforceable against the parties hereto in accordance with its
terms.
9. All defined terms used herein but not defined herein shall
have the meaning assigned to them in the Agreement.
Please acknowledge your agreement to the foregoing by endorsing this
letter in the space provided below and returning the same to us. This letter
agreement may be executed in any number of counterparts and shall be considered
but one and the same agreement.
Very truly yours,
/s/ William M. Danton
---------------------
William M. Danton, on behalf of himself
and Video Lottery Consultants, Inc.
8
<PAGE>
ACKNOWLEDGED AND AGREED:
FORTUNE ENTERTAINMENT CORPORATION,
a Bahama Corporation
By: XXXXXXXXXXXXXX
------------------------------
Its President
--------------------------
FORTUNE ENTERTAINMENT CORPORATION,
a Delaware corporation
By: XXXXXXXXXXXXXX
------------------------------
Its Chief Financial Officer
--------------------------
9
<PAGE>
EXHIBIT G
STOCK PLEDGE AGREEMENT
FECB shall grant Mr. Danton or his designee a security interest in 60%
of the issued and outstanding PVA Stock (such 60% of the issued and outstanding
PVA Stock being hereinafter referred to as the "Pledged Stock") on the following
terms and conditions:
1. FECD shall deliver to Mr. Danton or his designee certificate(s) for
the Pledged Stock, together with executed, undated blank stock powers and
otherwise in form for transfer, which certificate(s) will be held by Mr. Danton
or his agent pursuant to the terms of the stock pledge agreement.
2. The stock pledge agreement shall provide for, among other things,
the right of Mr. Danton to obtain ownership and control of the Pledged Stock if
FECB or FECD defaults under the Agreement, as amended from time to time, and
such default is not cured within the time period described in Agreement.
3. So long as any of the Pledged Stock is subject to the stock pledge
agreement, FECD shall not be permitted to change, amend or modify in any way
whatsoever the bylaws and certificate of incorporation of PVA without the prior
written consent of the Danton Group, which consent shall only be provided in the
sole discretion of the Danton Group.
4. So long as any of the Pledged Stock is subject to the stock pledge
agreement, FECD shall not be permitted to sell, convey or otherwise transfer the
Assets, including, without limitation, the Pledged Stock, the Intellectual
Property, the Manufacturing Agreement and the Software Release or place any
liens or any encumbrances whatsoever on the Asset, including, without
limitation, the Pledged Stock, the Intellectual Property, the Manufacturing
Agreement or the Software Release in each case without the prior written consent
of the Danton Group, which consent shall only be provided in the sole discretion
of the Danton Group. PVA shall not incur any debt, liability or other obligation
or responsibility outside of the ordinary course of business without first
obtaining the prior written consent of the Danton Group, which consent shall not
be unreasonably withheld.
5. So long as FECB and FECD are not in default under the Agreement,
FECD or FECB shall have all voting rights and dividend rights attached to the
Pledged Stock.
6. Mr. Danton or his designee, as applicable, shall cause the Pledged
Stock to be released from the security interest granted by the stock pledge
agreement once FECD
10
<PAGE>
has fully and timely performed all of its obligations under Sections 2.2(b),
2.2(d), 2.2(b) and the first two sentences of 2.2(i) of the Agreement, as
amended from time to time.
11
<PAGE>
EXHIBIT G-1
OPTION AGREEMENT
FECB shall grant Mr. Danton or his designee an option to purchase 40%
of the issued and outstanding PVA Stock (such 40% of the issued and outstanding
PVA Stock being hereinafter referred to as the "Optioned Stock") on the
following terms and conditions:
1. Subject to the terms of the Agreement, as amended from time to time,
upon a default by FECD or FECB under the Agreement, as amended from time to
time, which default is not cured within the time period described in the
Agreement, Mr. Danton or his designee shall have the right to purchase from FECB
the Optioned Stock for a period of 30 days following the expiration of the cure
period. The purchase price shall be payable 30 days following the end of the
cure period and shall consist of:
A. a return to FECD of $1.5 million shares of FEC Stock plus
any other shares FEC Stock issued pursuant to the top-up provisions;
and
B. an amount of cash equal to the money paid by FECD and FECB
under this Agreement.
2. The purchase price shall be reduced by the amount of any mortgage or
other encumbrance on the Optioned Stock.
3. The Option Agreement shall be in effect until the Closing Date.
12
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
(a Bahamas corporation)
Suite 303 - 543 Granville Street
Vancouver, British Columbia V6CIX8
Canada
November 19, 1997
Louis J. Grassa and
Team Rainbow Inc.
c/o 200 Walnut Street, Suite G
Saugus, Maine 01906
Dear Sirs:
Re: Team Rainbow Inc. ("Team Rainbow") - Rainbow 21
We are writing this letter to set out the general term of our agreement relating
to the potential acquisition by Fortune Entertainment Corporation or an
affiliate thereof (any such entity being hereinafter referred to as "Fortune")
of all of the rights, assets and business of Team Rainbow relating to a
multi-positional blackjack game known as "Rainbow 21", and as more particularly
described in Schedule "A" attached hereto (the "Rainbow Assets").
Term defined in this agreement are also used in the schedules attached hereto
and vice-versa.
In order to induce Fortune to enter into this agreement, Louis J. Grassa and
Team Rainbow make the representations and warranties and covenants set out in
Schedule B.
1. Louis J. Grassa and Team Rainbow hereby grant to Fortune the
irrevocable and exclusive option (the "Option" to acquire the Rainbow
Assets, subject to the terms and conditions hereof.
2. In order to exercise the Option, Fortune must:
(a) pay U.S.$10,000 to Team Rainbow on or before November 24,
1997;
(b) pay an additional U.S. $30,000 to Team Rainbow by January 31,
1998;
(c) pay an additional U.S. $10,000 to Team Rainbow by February 28,
1998;
(d) pay an additional U.S. $30,000 to Team Rainbow by March 31,
1998; and
(e) cause to be delivered to Team Rainbow by February 28, 1998,
200,000 shares of the publicly traded corporation that
directly or indirectly controls the Rainbow Assets (the
"Shares").
3. (a) Upon satisfaction of the payments and delivery of the
Shares as described in item 2 above, Fortune shall be deemed
to have exercised the Option (the "Option Exercise Date").
Upon the deemed exercise of the Option, Team Rainbow shall
transfer to Fortune all of Team Rainbow's rights title and
interest in and to the
<PAGE>
Rainbow Assets, free and clear of all liens, claims and
encumbrances. The documents evidencing transfer of such right,
title and interest shall be in form and substance satisfactory
to Fortune's legal counsel; and
(b) Should Fortune fail to exercise the Option, Team Rainbow shall
be entitled to retain all of the payments made and Shares
delivered to Team Rainbow pursuant to this agreement as
consideration for having granted the Option and the parties
shall have no further obligations to each other.
4. During the currency of the Option, Louis J. Grassa and Team Rainbow
shall Cause the Business to be operated in the ordinary course and not
to do anything that could frustrate the intent of this agreement.
5. If Fortune is deemed to have exercised the Option, Fortune shall have
the following obligations to Team Rainbow:
(a) If during the last five trading days in the twelfth month
after the Option Exercise Date the simple average closing
price for the Shares that are of the same class as the Shares
on the public market on which they are traded (the "Market
Price") does not equal or exceed U.S.$2.25 per share, Fortune
shall either:
(i) pay to Team Rainbow the difference between
U.S.$450,000 and 200,000 multiplied by the Market
Price (the "Difference"); or
(ii) deliver to Team Rainbow additional shares of the same
class as the Shares having a value equal to the
Difference, with such additional shares being valued
at the Market Price.
(b) For the first 12 months after the Option Exercise Date (the
"First Year"), Fortune shall pay Team Rainbow, its successors
or assigns the sum of $62,500.00; one third of said sum
payable the first day of every fourth month after the Option
Exercise Date. In addition, during the First Year, Fortune
shall pay Team Rainbow the greater sum of $50,000.00 or 10% of
the net revenues of the Game ("Additional First Year
Consideration"). The Additional First Year Consideration
shall be paid in the amounts of $16,666.67 the first business
day of every fourth month after the Option Exercise Date.
Within 30 days of the first anniversary of the Option Exercise
Date, Fortune shall provide an accounting of all revenues and
expenses of the Game and pay over all monies owed, if any, as
a result of any amount representing a positive balance of the
difference between 10% of net revenues and the $50,000.00 paid
to Team Rainbow as Additional First Year Consideration.
(c) In the 12 month period commencing on the first anniversary of
the Option Exercise Date (the "Second Year"), Fortune shall
pay $62,500.00 to Team
-2-
<PAGE>
Rainbow in three (3) installments of $20,833.33 each payable
the first business day of each fourth month after the first
anniversary. As additional compensation, Fortune shall pay the
greater of $150,000.00 or 10% of the net revenues of the Game
("Second Year Additional Consideration"). The Second Year
Additional Consideration shall be paid in installments of
$50,000.00 each commencing the first business day of each
fourth month after the first anniversary of the Option
Exercise Date. Within thirty (30) days after the second
anniversary of the Option Exercise Date, Fortune shall provide
a full and complete accounting of all revenues and expenses of
the Game, together with funds representing all money owed, if
any, of any balance as a result of 10% of net revenues being
greater than $150,000.00 in the Second Year.
(d) In the 24 month period commencing on the second anniversary of
the Option Exercise Date, Fortune shall pay $125,000.00 to
Team Rainbow in six (6) installments of $20,833.13 each
payable the first business day of each fourth month after the
second anniversary.
(e) Commencing on the third anniversary of the Option Exercise
Date, Fortune shall pay additional consideration of five
percent (5%) of the net revenues of the Game for the preceding
12 month period payable within thirty (30) days after each
anniversary, together with a full and complete accounting of
revenues and expenses of the Game.
"Revenues" for the purposes hereof shall mean gross revenues from sales
or marketing of the Game, minus the direct costs and expenses
associated with marketing and distributing the Game, plus a reasonable
portion of general administrative expenses of Fortune related to
conducting its business operations.
6. In the event that Fortune is in default of any term or condition of
this agreement for more than sixty (60) days after written notice of
such default has been given to Fortune, Team Rainbow, its successors,
assigns, or designees may. at its option, reacquire the Rainbow Assets
by delivering the number of Shares and additional shares delivered to
Team Rainbow pursuant to this agreement. No additional consideration
shall be required to reacquire the Rainbow Assets. Upon delivery of
such shares, Fortune shall immediately transfer, assign, and deliver
all records, contracts, licences, approvals, permits and all other
private and governmental rights, without costs, to Team Rainbow, which
shall thereafter succeed to all rights and ownership of said
agreements, rights, licences, approvals, permits, and all other private
and Governmental rights. Fortune shall cooperate and undertake all acts
reasonably necessary to accomplish the transfer of all rights
reacquired by Team Rainbow.
7. Upon request by Fortune, Team Rainbow will provide Fortune and its
consultants with all information and materials necessary for Fortune to
be fully satisfied with its due diligence investigations of the Rainbow
Assets.
-3-
<PAGE>
8. All communications required or contemplated by this agreement shall be
in writing and addressed to the parties at the addresses set out above,
or such other address as a party may advise the other parties from time
to time.
9. The parties shall promptly execute or cause to be executed all
documents and other instruments of further assurance which may be
reasonably necessary or advisable to carry out fully the intent of this
agreement.
10. This agreement shall enure to the benefit of and be binding on the
parties and their respective successors and assigns. Fortune may assign
this agreement or its rights thereunder to an affiliated corporation.
11. Any modifications to this agreement must be in writing and signed by
all of the parties.
12. This agreement embodies the entire agreement among the parties and
supersedes all previous negotiations and agreements relating to the
subject matter hereof.
13. This agreement is to be interpreted in British Columbia courts, under
British Columbia law with all parties accepting British Columbia's
Jurisdiction.
14. Time shall be of the essence.
15. The schedules attached hereto form a part of this agreement.
This letter once executed by all parties shall constitute a binding agreement.
The parties may negotiate a more formal agreement covering this subject matter
(and incorporating representations, warranties and agreements customary for
transactions of the size and nature contemplated hereby) but until such formal
agreement is settled and executed, this letter shall govern.
FORTUNE ENTERTAINMENT CORPORATION
per: ________________________
_____________________________
Louis J. Grassa on behalf of
himself and Team Rainbow
-4-
<PAGE>
SCHEDULE"A"
The Rainbow Assets means all of:
(a) The Intellectual Property;
(b) the Assets;
(c) any other intellectual property rights existing anywhere in the world
owned by Team Rainbow including, without limitation, all copyrights,
industrial designs, trademarks, Confidential information and patents
related to the Game and the Business;
(d) all Products owned by Team Rainbow;
(e) the Business, including all goodwill relating thereto; and
(f) the Claims.
The following terms shall have the respective meanings ascribed to them as
follows:
"Assets" means:
(f) all assets, real, personal, and mixed, tangible or intangible owned by
Team Rainbow and relating to the Business, and without limiting the
generality of the foregoing:
(i) all inventories of (i) computer program code (in all media) of
the software programs; (ii) program documentation, including
user materials; and (iii) all other unused or reusable
materials, stores, and supplies, in each case to the extent
used in, relating to, or arising out of the Business; and
(ii) all private and Governmental rights, approvals, permits,
registrations, contracts, agreements, licences, and other
commitments and arrangements, oral or written, with any person
or entity respecting the ownership, licence, design,
development, distribution, marketing, use, or maintenance of
the Game, the Equipment, the Rules, related technical or user
documentation, and databases, in each case relating to or
arising out of the Business.
"Business" means the business of developing and licencing or renting the Game
through purchasers, licencees and distributors;
"Claims" means all claims that Team Rainbow may have against any person relating
to or arising from the Rainbow Assets or the Business;
"Confidential Information" means all information or data which has come within
the knowledge of Team Rainbow or which may come within the knowledge of Team
Rainbow or which has been developed or may be developed by Team Rainbow which
relates to the Products including,
<PAGE>
without limitation, any information regarding computer programs or software,
Products, costs, equipment, operations, suppliers or customers of Team Rainbow
relating to the Game, all technical information, legal opinions, assessments,
know-how, trade secrets, confidential information, procedures, processes,
diagrams, specifications, Improvements, formulations, plans, systems and any
information relating to the design, manufacture, improvement, testing, marketing
and sale of the Products;
"Copyright" means the United States copyright identified by number _____________
dated and stamped _____________ protecting the Rules and the regulations and the
entire text of all pertinent Game information;
"Equipment" means the physical equipment and materials designed for use in
connection with the Game or the promotion of the Game;
"Game" means the multi-positional blackjack game known as Rainbow 21 described
in the Patents and the Rules;
"Improvements" means all improvements, enhancements, additions to, modifications
and derivations of and inventions relating to the Products made, developed or
created by or for Team Rainbow (or to which Team Rainbow may be entitled) at any
time on or before the Option Exercise Date and will include any new feature or
function made, developed or created by or for any such person or persons which
provides additional capability to the Products or makes the same more versatile,
useful or marketable and any change of the Products which was or is intended to
improve performance, and any new or additional Products or services developed or
acquired by Team Rainbow before the Option Exercise Date which are derived from
a Product.
"Intellectual Property" means the Patents, the Copyright, the Trademarks and the
Confidential Information;
"Patents" means United States Patent No. 5,390,934 dated February 21, 1995 and
United States Patent No. 5,494,296 dated February 27, 1996 and any divisions,
continuations, continuations-in part, extensions and reissues thereof, and the
inventions described or claimed therein and all foreign counterparts of such
United States patents, and any divisions, continuations, continuations-in-part,
extensions and reissues thereof, and the inventions described or claimed therein
and all patent applications or patents which may relate to any Improvements;
"Products" includes the Equipment, the Game and all Improvements;
"Rules" means the rules described in the document attached hereto as Exhibit 1;
and
"Trademarks" means "Rainbow 21" and any other trademarks now owned or hereafter
owned or acquired, prior to the Option Exercise Date, by Team Rainbow in respect
of the Products.
<PAGE>
EXHIBIT I
[Rules]
<PAGE>
SCHEDULE "B"
REPRESENTATIONS, WARRANTIES AND COVENANTS
1. Louis J. Grassa and Team Rainbow represent, warrant and covenant that:
(a) at the Option Exercise Date, Team Rainbow will own all of the Rainbow
Assets free and clear of any claims or encumbrances;
(b) Team Rainbow has the authority to enter into the agreement to which
this Schedule is attached (the "Agreement") and to complete the
transactions contemplated thereby, without the approval or consent of
any other person or authority;
(c) Team Rainbow has not transferred or agreed to transfer the Rainbow
Assets to any party (other than Fortune) and has not encumbered its
rights in the Rainbow Assets;
(d) there is no law, order or other legal restraint which would prohibit
commercial exploitation of the Rainbow Assets in the United States;
(e) at the Option Exercise Date no entity other than Fortune will have any
right to claim or acquire an interest in the Rainbow Assets;
(f) Team Rainbow has the exclusive world wide right and licence to develop,
enjoy, commercialize, distribute, market and exploit the Rainbow
Assets, free from the claims of others, and to transfer such right and
the Rainbow Assets to Fortune as contemplated hereby;
(g) Team Rainbow has full power and capacity to enter into the Agreement
and all necessary acts of Team Rainbow have been performed in order to
authorize the Agreement and the performance of it;
(h) the performance by Team Rainbow of the Agreement will not conflict with
or result in a breach of any covenants or agreements contained in, or
constitute a default under or result in the creation of any encumbrance
pursuant to the provisions of any agreement to which Team Rainbow is a
party or by which Team Rainbow may be bound or to which Team Rainbow
may be subject or any judgment, decree, order, rule or regulation of
any court or administrative body by which Team Rainbow is bound or, to
the knowledge of Team Rainbow, any statute or regulation applicable to
Team Rainbow;
(i) the entering into and the performance of the Agreement and the
transactions contemplated hereby will not result in the violation of
any of the terms and provisions of the constating documents of Team
Rainbow, any shareholders' or directors' resolutions, or any indent are
or other agreement, written or oral, to which Team Rainbow may be bound
or by which Team Rainbow may be subject or any judgment, decree, order,
rule or regulation of any court or administrative body by which Team
Rainbow is bound or to the knowledge of Team Rainbow. any statute or
regulation applicable to Team Rainbow;
<PAGE>
(j) Exhibit 2 constitutes a complete list of all rights, including physical
material owned, held or controlled by Team Rainbow;
(k) there is not now and on the Option Exercise Date there will not be any
litigation, proceeding or investigation pending or threatened against
Team Rainbow nor does Team Rainbow know, or have any grounds to know,
of any basis for any litigation, proceeding or investigation against
Team Rainbow, any of which would materially affect Team Rainbow without
limiting the generality of the foregoing, there are, and on the Option
Exercise Date there will be, no intercorporate debts or liabilities
between Team Rainbow and its shareholders;
(l) to the best of the knowledge and belief of Team Rainbow, Team Rainbow
has complied with any and all rules, regulations and policies and any
and all regulatory authorities, agencies and commissions having
jurisdiction over Team Rainbow or its assets or to which Team Rainbow
or its assets may be subject;
(m) Team Rainbow does not have outstanding, nor is it party to any material
agreement, contract or commitment, whether written or oral, of any
nature or kind whatsoever, except the material contracts (the "Material
Contracts") as set out in Exhibit 3. Each of the Material Contracts has
been duly authorized, executed and delivered by Team Rainbow and is a
legal, valid and obligation of Team Rainbow enforceable in accordance
with its terms;
(n) Team Rainbow is the owner of all right, title and interest in and to
the Rainbow Assets, free and clear of all liens, security interests,
charges, encumbrances, and other adverse claims, and has the right to
use without payment to a third party all of the Rainbow Assets;
(o) no present or past employee, director, officer or shareholder of Team
Rainbow owns directly or indirectly, in whole or in part, any
intellectual property which Team Rainbow is presently using or which is
necessary for the conduct of the Business:
(p) the Patents are currently in compliance with formal legal requirements
(including payment of filing, examination, maintenance fees and proofs
of working or use) are valid and enforceable, and are not subject to
any maintenance fees or taxes. The Patents have not been and are not
now involved in any interference, reissue, reexamination or opposition
proceeding. There is no potentially interfering patent or patent
application of any third party. The Patents are not infringed and have
not been challenged or threatened in any way. Neither the Game nor any
of the Products made, used, licenced, sold or distributed, nor any
process or know-how used by Team Rainbow infringes or is alleged to
infringe any patent or other proprietary right of any other person or
entity. All Products made, used, licenced, sold or distributed under
the Patents have been marked with proper patent notice;
(q) the Copyrights have been registered and are currently in compliance
with formal legal requirements, are valid and enforceable, and are not
subject to any maintenance fees or
<PAGE>
taxes or actions. No Copyright is infringed or has been challenged or
threatened in any way. None of the subject matter of any of the
Copyrights infringes or is alleged to infringe any copyright of any
third party or is a derivative work based on the work of a third party.
All works encompassed by the Copyrights have been marked with the
proper copyright notice; and
(r) the Trademarks that have been registered with the United States Patent
and Trademark Office or any other country's trademark registration
office are currently in compliance with all formal legal requirements
(including the timely post-registration filing of affidavits of use and
incontestability and renewal applications), are valid and enforceable,
and are not subject to any maintenance fees or taxes or actions. No
Trademark has been or is now involved in any opposition, invalidation,
or cancellation and no such action is threatened with respect to any of
the Trademarks. There is no potentially interfering trademark or
trademark application of any third party. No Trademark is infringed or
has been challenged or threatened in any way. None of the Trademarks
used by Team Rainbow infringes or is alleged to infringe any trade
name, trademark, or service mark, of any third party. All products and
materials containing a Trademark bear the proper federal or other
registration notice where permitted by law.
<PAGE>
EXHIBIT 2
[list of rights and assets]
<PAGE>
EXHIBIT 3
[Material Contracts]
<PAGE>
May 26, 1998
Team Rainbow, Inc.
144 Elm Street
2nd Floor - Suite 16
Biddleford, Maine
USA (4005
Attention: Louis J. Grassa:
Dear Mr. Grassa:
RE: OPTION AGREEMENT - RAINBOW 21
- - --- -----------------------------
Thank you for your fax of May 22, 1998 proposing amendments to the Option
Agreement.
Your proposal is acceptable to us with one change and one clarification.
The change we request is in your Clause 2 (relating to the payment of US
$90,000). Our proposal is to make a payment of $45,000 on or before July 31,
1998 and another payment of $45,000 on or before September 30, 1998. This time
line is more accommodating to our anticipated funding of the Company.
Our point of clarification relates to your Clause 3. Upon execution of the
letter agreement, we shall forthwith instruct our transfer agents (Continental
Stock Transfer & Trust Company in New York) to issue the 200,000 common shares
of Fortune Entertainment Corporation to Team Rainbow, Inc., subject to the rules
and regulations of the S.E.C. Simultaneously, we shall instruct our legal
counsel, Hart & Trinen to issue the necessary legal opinion to the transfer
agent so the shares can be issued. The process may take a week or ten days
before the Certificates are delivered.
<PAGE>
Team Rainbow, Inc.
Page 2
If the above two points are acceptable to you, please confirm and we shall do
all that is necessary to finalize the matter without any delay.
Thank you for your cooperation.
Yours truly,
FORTUNE ENTERTAINMENT CORPORATION
David B. Jackson
Chief Executive Officer & Director
Acknowledged and Agreed to by:
TEAM RAINBOW, INC.,
a Massachusetts Corporation
By: Louis J. Grasso
---------------
Date: May 22, 1998
<PAGE>
AMENDMENT TO THE RAINBOW 21 ASSET ACQUISITION
AGREEMENT DATED NOVEMBER 19, 1997, AND AMENDED ON
NOVEMBER 25, 1997 AND FURTHER AMENDED ON May 26,1998
BETWEEN: FORTUNE ENTERTAINMENT CORPORATION (FORTUNE)
AND: TEAM RAINBOW INC.(TEAM RAINBOW)
WHEREAS:
A. the Parties have entered into an agreement ("Agreement") whereby
Fortune is acquiring the assets of Team Rainbow, which assets are
described and listed in Schedule A of the November 19, 1997 agreement
and also attached hereto as Exhibit 1; and
B. the parties now wish to further amend the terms of the Agreement;
NOW THEREFORE THIS AGREEMENT WITNESSETH that in consideration of the premises,
representations, warranties, covenants and agreements herein set forth, the
parties hereby agree as follows:
1. Fortune shall make the following revised and amended payments to Team
Rainbow, replacing the two US $45,000 payments called for in the
amended agreement dated May 26, 1998:
(i) US $10,000 by, on, of, before July 31, 1998
(ii) US $2,500 by, on, or before August 31, 1998
(iii) Upon execution of this agreement, cause to issue 50,000 fully
paid, non-assessable common shares of Fortune in accordance
with the Rules and Regulations of the Securities Exchange
Commission.
2.0 TEAM RAINBOW
2.1 Upon receipt of the US $10,000 by, on, or before July 31, 1998 and
delivery of the 50,000 common shares of FEC (Items l(i) and l(ii)
above), shall forthwith transfer and deliver all the assets listed in
Exhibit I to Fortune, free and clear of any and all encumbrances.
2.2 Transfer and or Assign to Fortune any and existing contracts,
distribution agreements, licenses, permits and revenues pertaining to
and in respect of Rainbow 21.
3.0 Team Rainbow shall also assist Fortune at the request of Fortune in the
transfer of all existing sales contracts, distribution contracts, sales
materials, potential customers, manufacturing contracts, etc. and
generally making available any pertinent information or
<PAGE>
communications with parties interested in Rainbow 21; all to be
completed prior to closing.
4.0 Upon execution of this agreement, the parties hereby agree to executing
a consolidated agreement incorporating the relevant terms and
conditions of the agreement and this Amendment. The consolidated
agreement shall also include a non-compete undertaking by Team Rainbow
Inc.'s principles viz. Louis Grassa and Ted Silvester.
IN WITNESS WHEREOF the parties hereto have executed these presents of the 22 day
of July, 1998.
FORTUNE ENTERTAINMENT CORPORATION
____________________________________
David B. Jackson (President and CEO)
TEAM RAINBOW INC.
Louis J. Grasso
- - --------------------
Authorized Signatory
<PAGE>
SCHEDULE"A"
The Rainbow Assets means all of'
(a) The Intellectual Property;
(b) the Assets;
(c) any other intellectual property rights existing anywhere in the world
owned by Team Rainbow including, without limitation, all copyrights,
industrial designs, trademarks, confidential information and patents
related to the Game and the Business;
(d) all Products owned by Team Rainbow;
(e) the Business, including all goodwill relating thereto; and
(f) the Claims.
The following terms shall have the respective meanings ascribed to them as
follows:
"Assets" means:
(a) all assets, real, personal, and mixed, tangible or intangible owned by
Team Rainbow and relating to the Business, and without limiting the
generality of the foregoing:
(i) all inventories of (i) computer program code (in all media) of
the software programs; (ii) program documentation, including
user materials; and (iii) all other unused or reusable
materials, stores, and supplies, in each case to the extent
used in, relating to, or arising out of the Business; and
(ii) all private and governmental rights, approvals, permits,
registrations, contracts, agreements, licences, and other
commitments and arrangements, oral or written, with any person
or entity respecting the ownership, licence, design,
development, distribution marketing, use, or maintenance of
the Game, the Equipment, the Rules, related technical or user
documentation, and databases, in each case relating to or
arising out of the Business.
"Business" means the business of developing and licencing, or renting the Game
through purchasers, licencees and distributors;
"Claims" means all claims that Team Rainbow may have against any person relating
to or arising from the Rainbow Assets or the Business;
"Confidential Information" means all information or data which has come within
the knowledge of Team Rainbow or which may come within the knowledge of Team
Rainbow or which has been developed or may be developed by Team Rainbow which
relates to the Products including,
<PAGE>
without limitation, any information regarding computer programs or software,
Products, costs, equipment, operations, suppliers or customers of Team Rainbow
relating to the Game, all technical information, legal opinions, assessments,
know-how, trade secrets, confidential formulations, plans, information,
procedures, processes, diagrams, specifications, improvements, systems and any
information relating to the design, manufacture, improvement, testing, marketing
and sale of the Products;
"Copyright" means the United States copyright identified by number stamped
protecting the Rules and the regulations and the entire text of all pertinent
Game information;
"Equipment" means the physical equipment and materials designed for use in
connection with the Game or the promotion of the Game;
"Game" means the multi-positional blackjack game known as Rainbow 21 described
in the Patents and the Rules;
"Improvements" means all improvements. enhancements, additions to, modifications
and derivations of and inventions relating to the Products made, developed or
created by or for Team Rainbow (or to which Team Rainbow may be entitled) at any
time on or before the Option Exercise Date and will include any new feature or
function made, developed or created by or for any such person or persons which
provides additional capability to the Products or makes the same more versatile,
useful or marketable and any change of the Products which was or is intended to
improve performance, and any new or additional Products or services developed or
acquired by Team Rainbow before the Option Exercise Date which are derived from
a Product;
"Intellectual Property" means the Patents, the Copyright, the Trademarks and the
Confidential Information;
"Patents" means United States Patent No. 5,390,934 dated February 21, 1995 and
United States Patent No. 5,494,296 dated February 27, 1996 and any divisions,
continuations, continuations-in part, extensions and reissues thereof, and the
inventions described or claimed therein and all foreign counterparts of such
United States patents, and any divisions, continuations, continuations-in-part,
extensions and reissues thereof, and the inventions described or claimed therein
and all patent applications or patents which may relate to any Improvements;
"Products" includes the Equipment, the Game and all Improvements; "Rules" means
the rules described in the document attached hereto as Exhibit 1; and
"Trademarks" means "Rainbow 21" and any other trademarks now owned or hereafter
owned or acquired, prior to the Option Exercise Date, by Team Rainbow in respect
of the Products.
"Rules" means the rules described in the document attached hereto as Exhibit 1;
and
"Trademarks" means "Rainbow 21" and any other trademarks now owned or hereafter
owned or acquired, prior to the Option Exercise Date, by Team Rainbow in respect
of the Products.
<PAGE>
ASSIGNMENT
OF
SOFTWARE RELEASE
THIS ASSIGNMENT is dated as of the 14th day of July, 1998, by and
between William M. Danton, an individual with an address at 144 Elm Street,
Biddleford, Maine, 04005 (the "Assignor") and Fortune Entertainment Corporation,
a Bahama corporation with a place of business at 303-543 Granville Street,
Vancouver, British Columbia V6C IX8 (the "Assignee").
RECITALS:
A. Pursuant to a certain Purchase and Sale Agreement among Assignor,
Assignee, Video Lottery Consultants, Inc., a Maine corporation and Fortune
Entertainment Corporation, a Delaware corporation ("FECD"), dated September 5,
1997, as amended on January 27, 1998, January 29, 1998, March 12, 1998 and July
9, 1998 (such agreement, as it has been amended and may hereafter be amended the
"Purchase and Sale Agreement", Assignor has agreed to conditionally assign to
Assignee its right, title and interest in, to and under the instruments
described below.
B. All defined terns used but not otherwise defined herein shall have
the meaning assigned to them in the Purchase and Sale Agreement.
NOW, THEREFORE, in Consideration of the premises, and for other good
and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Assignor and Assignee hereby agree as follows:
1. Assignor does hereby assign, transfer, convey, grant, bargain,
set-over, release, deliver, vest and confirm unto Assignee, and its successors
and assigns, the entire right, title and interest of Assignor in and to the
Software Release, dated March 26, 1997, a copy of which is attached hereto and
made a part hereof as Exhibit A (the "Contract").
2. Assignee accepts assignment of the aforementioned Contract and
hereby agree to assume and perform and fully discharge when due all of
Assignor's liabilities and responsibilities thereunder, whenever incurred or
arising (the "Assumed Liabilities"). In connection therewith, Assignee agrees to
indemnify and hold harmless Assignor of, from and against any and all claims
relating to the Assumed Liabilities.
3. This is a conditional assignment only and, in the event of a default
by Assignee under the Purchase and Sale Agreement, this Assignment shall
terminate and the Software Release shall be immediately returned to Assignor.
4. This Assignment shall be construed in accordance with the laws of
the State of Maine.
<PAGE>
5. The Assignment shall be binding upon and shall inure to the benefit
of the parties hereto and their respective legal representatives, successors and
assigns.
IN WITNESS WHEREOF, Assignor and Assign have executed this Agreement as
of the date hereof.
ASSIGNOR:
____________________________ ___________________________________
Witness Mr. William M. Danton
ASSIGNEE:
FORTUNE ENTERTAINMENT
CORPORATION, a Bahama Corporation
____________________________ By:________________________________
Witness
-2-
<PAGE>
ASSIGNMENT
OF
MANUFACTURING AGREEMENT
THIS ASSIGNMENT is dated as of the 14th day of July, 1998, by and
between Video Lottery Consultants, Inc., a Maine corporation with a place of
business at 144 Elm Street, Biddleford, Maine, 04005 (the "Assignor") and
Fortune Entertainment Corporation, a Bahama corporation with a place of business
at 303-543 Granville Street, Vancouver, British Columbia V6C IX8 (the
"Assignee").
RECITALS:
A. Pursuant to a certain Purchase and Sale Agreement among Assignor,
Assignee, William F. Danton ("Danton") and Fortune Entertainment Corporation, a
Delaware corporation ("FECD"), dated September 5, 1997, as amended on January
27, 1998, January 29, 1998, March 12, 1998 and July 9, 1998 (such agreement, as
it has been amended and may hereafter be amended the "Purchase and Sale
Agreement", Assignor has agreed to conditionally assign to Assignee its right,
title and interest in, to and under the instruments described below.
B. All defined terns used but not otherwise defined herein shall have
the meaning assigned to them in the Purchase and Sale Agreement.
NOW, THEREFORE, in Consideration of the premises, and for other good
and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Assignor and Assignee hereby agree as follows:
1. Assignor does hereby assign, transfer, convey, grant, bargain,
set-over, release, deliver, vest and confirm unto Assignee, and its successors
and assigns, the entire right, title and interest of Assignor in and to the
Manufacturing Agreement, dated April 18, 1997, by and between Assignor and
Amusement World, Inc., a copy of which is attached hereto and made a part hereof
as Exhibit A (the "Contract").
2. Assignee accepts assignment of the aforementioned Contract and
hereby agree to assume and perform and fully discharge when due all of
Assignor's liabilities and responsibilities thereunder, whenever incurred or
arising (the "Assumed Liabilities"). In connection therewith, Assignee agrees to
indemnify and hold harmless Assignor of, from and against any and all claims
relating to the Assumed Liabilities.
3. This is a conditional assignment only and, in the event of a default
by Assignee under the Purchase and Sale Agreement, this Assignment shall
terminate and the Software Release shall be immediately returned to Assignor.
4. This Assignment shall be construed in accordance with the laws of
the State of Maine.
<PAGE>
5. The Assignment shall be binding upon and shall inure to the benefit
of the parties hereto and their respective legal representatives, successors and
assigns.
IN WITNESS WHEREOF, Assignor and Assign have executed this Agreement as
of the date hereof.
ASSIGNOR:
VIDEO LOTTERY CONSULTANTS, INC.
_______________________________ By:_________________________________
Witness William M. Danton
President
ASSIGNEE:
FORTUNE ENTERTAINMENT
CORPORATION, a Bahama Corporation
_______________________________ By:_________________________________
Witness
-2-
