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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
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/x/ Annual Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 1998
/ / Transition report under Section 13 or 15(d) of the Securities Act of 1934
for the transition period from _________ to ____________
Commission file number 0-23859
FORTUNE ENTERTAINMENT CORPORATION
(Name of Small Business Issuer in its Charter)
Delaware 88-04053347
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
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2700 East Sunset Road, Suite 39
Las Vegas, Nevada 89120
(702) 895-7812
(Address and telephone number of principal executive office)
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Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Act:
Title of Class
Common Stock, $.0001 par value
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Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes / / No /X/
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. / /
Revenues for the issuer's most recent fiscal year were $ none .
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the closing price at which the stock was sold on March
31, 1999 was $6,115,610.
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ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS
Check whether the issuer has filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court. Yes / / No / /
APPLICABLE ONLY TO CORPORATE REGISTRANTS
As of March 31, 1999, the issuer had 15,039,870 shares of common stock,
$.001 par value, outstanding.
Transitional Small Business Disclosure Format: Yes / / No /x/
DOCUMENTS INCORPORATED BY REFERENCE
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Part I
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'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. The
Company is in the early stages of marketing its products and has not realized
any sales, lease or licensing revenue. The Company is also in the early stages
of obtaining regulatory approvals which may be necessary in order to realize the
initial revenues from its gaming products. See "Business of the Issuer."
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 accounts of
the Company at their estimated fair values at the time of the transaction. See
Notes to Consolidated Financial Statements.
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.
From April 1998 through August 1998 the Company purchased 131,250
shares or 11.3% of the outstanding common stock 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 machines developed by Sega of Japan. See "Business of the Issuer - Sega
Gaming Technology, Inc."
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The market for gaming machines is world-wide and is subject to widely
disparate and continually changing governmental regulatory requirements in the
different jurisdictions where the use of gaming machines is permitted. In
addition, the gaming machine industry is dominated by several large
manufacturers with well established channels of distribution and adequate
financial and manufacturing resources to meet the needs of the world wide gaming
industry. As a new and smaller entrant in the gaming machine industry the
Company's strategy is to place the initial emphasis for the distribution of its
gaming machines on the United States Tribal Indian and Charity gaming markets.
Because of the geographic proximity of these markets and the Company's
evaluation of applicable regulatory reuirements, the Company believes it has or
can obtain sufficient resources to market its gaming products and to obtain
necessary regulatory approvals in these areas.
As suitable opportunities arise, the Company also intends to market its
machines in North American and international markets with distributors who would
assume responsibility for meeting applicable regulatory requirements and for
maintenance of the machines. The Company has been approached by an entity which
is seeking to negotiate an exclusive distribution arrangement of this type
covering Costa Rica.
The Company is in the development stage and has not as yet realized
revenues from the sale, lease or licensing of its products. 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.
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 quoted on the NASD's OTC Bulletin
Board (the "Bulletin Board") under the trading symbol "FETG." 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 two initial 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.
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("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 machines developed by Sega of Japan. The Company is not
presently developing or seeking to acquire any other gaming products although it
may do so in the future.
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, in each
case, for progressively larger payoffs. The Company has started the initial
market presentation of the Fortune Poker system in various domestic venues, with
initial emphasis on Charity Markets and Indian Tribal Casinos. Technical
development of the Fortune Poker System is substantially completed and the
Company has entered into a manufacturing arrangement which it believes would be
adequate to meet any initial demand for the machines. 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 where a local distributor would assume responsibility for
marketing, regulatory compliance and maintenance of the machines.
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
Company believes the additional wagering decisions allowed by the game generate
player involvement and excitement while requiring only a minimal additional
capital outlay by gaming operators who wish to install the system. 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, but the transfer of the state
licenses to the Company is subject to approval by the applicable state
regulatory authorities. The Company intends to make application for such
approvals within the next several months. The criteria generally applied by
casino jurisdictions such as Nevada, New Jersey and Mississippi include
evaluation of the responsibility, financial stability and character of the
applicant and persons financially interested or involved in gaming operations.
No assurance can be given as to the timing or costs that may be involved in
obtaining such approvals or whether some or all of such state approvals can be
obtained upon terms and conditions acceptable to the Company or at all. The
Company may not sell or lease the Rainbow 21 game in these jurisdictions until
approval is obtained.
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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. As of the date of
this report, Sodak has not rented or leased the Rainbow 21 games under the
agreement and the Company has not derived any revenues therefrom.
From April 1998 through August 1998 the Company purchased 131,250
shares or 11.3% of the outstanding common stock 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 machines developed by Sega of Japan, a worldwide leader in high-tech
entertainment including the manufacture of electronic games, consumer products
including home video games and the operation of amusement centers. See "Material
Acquisitions - SGTI" below.
Marketing and Sales
The Company is initially emphasizing the marketing of its existing
products, the Fortune Poker system and the Rainbow 21 game, in the Native
American and Charity gaming markets. The Company believes these markets offer
fewer regulatory and competitive barriers to entry than other North American and
international markets. See "Markets for Gaming Products" and "Government
Regulation" below. The Company has two full time employees principally engaged
in soliciting sales of the Company's products directly to Native American
Tribes, charities and other potential users of gaming machines. The Company's
sales staff also seeks to promote sales through independent distributors of
gaming equipment.
Fortune Poker System. 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 choice involved in selecting cards to throw away within the time
limits imposed by the game also increases player excitement which can enhance
casino profits. The system has been demonstrated at a gaming trade show and the
Company maintains five working machines on display at a showroom in Las Vegas.
The Company's initial market presentation of the system has begun in various
domestic venues, including Indian Tribal casinos, but no sales of the product
have as yet been made.
The Company is placing less emphasis on the North American Legal
Casino, Riverboat and Cruise ship and international markets, which, compared
with the Native American and Charity markets, are more competitive, more highly
regulated and subject to more disparate regulation. In addition, the legal
casino and international markets are dominated by a few large financially strong
companies with well established national amd world-wide channels of
distribution.
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The Company intends, initially, to lease its Fortune Poker system to
the charity and Indian Gaming segment of the market through its own sales staff
and through independent sales representatives and distributors. Under the
Company's leasing plan, the cost to the operator will be based on a daily lease
rate per unit, which reduces the initial capital outlay to the operator. In
addition, the systems are modular so that as their popularity builds, the
operator can add units to the system without abandoning the investment in
existing units.
The level of classification of Fortune Poker under the Indian Gaming
Regulatory Act is an important elememnt in placing the product in operations
located on Native American lands. Generally, Class II gaming is defined as
gaming which may be conducted on Native American lands if the state in which the
Native American reservation is located permits such activity for any purpose by
any person. Class III gaming, which includes traditional casino table games and
slot machines, 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. The Company's business will be impacted based upon how its products are
classified. See "Government Regulation" below.
The Company, on February 20, 1999, submitted a request for an advisory
opinion from the National Indian Gaming Commission ("NIGC") that the Video Poker
system should be classified as a Class II activity on the grounds that the
Fortune Poker system is an electronic adaptation of draw poker which, unlike a
traditional slot machine, is not expressly prohibited by any other Federal law
or by the gaming laws of at least some states. The granting of the advisory
opinion would not eliminate legal requirements to obtain NIGC approval of
specific arrangements with any Native American tribe and there can be no
assurance the Company's request for an advisory ruling will be granted. The
NIGC's denial of the request, depending on the reasons for the denial, could
have a material adverse effect on the Company by limiting the Company's
marketing activities to the more highly competitive legal casino and native
American Class III markets.
The Class II market includes a much larger number of tribal operators
than those who conduct compacted casino style operations. In addition, the large
manufacturers which tend to dominate the gaming machine industry do not
generally compete in the Class II market at least in part because their products
are designed to fall under the Class III category.
The Company has made several presentations and demonstrations of
Fortune Poker to native American tribes. The Company has had discussions with a
number of distributors and conducted some joint marketing activities, but has
not entered into any distribution arrangements for the Fortune Poker system.
Discussions are also being held with an independent distributor to place in
excess of 1,000 units on a joint-venture basis on Native Indian operations. The
Company cannot predict whether any of these demonstrations or discussions will
result in any sale or lease of the Company's Fortune Poker product.
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The Company has been approached by an entity seeking exclusive
distribution rights for the Company's Fortune Poker system in Costa Rica. The
Company and the prospective distributor are discussing an arrangement providing
for the payment of a licensing fee and monthly royalty based on gross revenue
with a minimum annual payment to the Company. The distributor would be
responsible for obtaining necessary Costa Rican regulatory approvals, compliance
with Costa Rican laws and maintenance of the equipment in Costa Rica, while the
Company would provide the distributor's personnel training and technical support
from the United States. These discussions are at an early stage, and there can
be no assurance that the discussions will result in a distribution agreement or
that any distribution arrangement will be a commercial success.
Rainbow 21. The Company has acquired all the patents and intellectual
property rights relating to the Rainbow 21 blackjack game, which 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 each state license is subject to
approval by the applicable state regulatory authority. The Company intends to
file applications to approve the transfer in all three states over the next
several months. See "Government Regulation" below.
Competition. In order to achieve commercial sales of its gaming
products, the Company must compete 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, 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.
The most significant competitive factor influencing the purchase 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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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 and 1,090,464 shares of the Company's Series C Preferred Stock.
Each share of Series A, Series B and Series C Preferred Stock is presently
convertible into one share of Common Stock.
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, July 9, 1998 and March 9, 1999 (the "PVA Agreement") for a
consideration of 1,647,500 shares of Common Stock, cash payments of $706,986
made through December 31, 1998, and remaining cash payments, secured by the
stock of PVA, of $200,000 due January 7, 1999, $250,000 due June 10, 1999 and
$255,000 due August 10, 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 use its best efforts to file
by April 30, 1999, a registration statement with the Securities and Exchange
Commission covering the shares of Common Stock issued to the Danton Group 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
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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
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.
The Company paid $140,000 and agreed to issue 100,000 shares of common
stock to the Danton Group in consideration of the Danton Group extending the
time for performance of some of the Company's obligations under the agreements.
See Note 3(b) of Notes to Financial Statements.
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, as amended, Amusement World, Inc. is granted the
exclusive right to manufacture PVA terminals for the Company until April 23,
2008. 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
arrangement with three other shareholders of Sega Gaming Technology, Inc.
("SGTI"); the Company has acquired 131,250 shares, or 11.13%, of the common
stock of SGTI for a total consideration of $1,071,250. 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
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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.
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 December 31, 1998 the Company had eight (8) full-time employees,
none of whom is represented by any labor union. Two of the employees are engaged
in marketing and sales activities; two are engaged in technical operations and
the four remaining employees are engaged in financial, administrative and
clerical matters.
Government Regulation
The Company's proposed 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.
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The operation of gaming on Native American reservations is subject to
the Indian Gaming Regulatory Act ("IGRA"). Under IGRA, certain types of gaming
activities are classified as Class I, Class II or Class III. The Company is
seeking an advisory opinion from the National Indian Gaming Commission that its
Fortune Poker system gaming machine should be classified as a Class II activity.
The classification is important because the Company believes competitive and
regulatory conditions are more favorable in the Class II market.
Fortune Poker System. The Company is pursuing regulatory approval for
its Fortune Poker system in several states. The Company has two full time
employees on its technical staff who are able to address almost all of the
questions raised by licensing authorities and to conduct or oversee laboratory
testing of the equipment comprising its products. When the Company's staff lacks
any necessary technical expertise, the Company intends to engage expert
consultants to assist it in addressing issues that may arise through the
licensing approval process.
Rainbow 21. The Company has acquired all the patents and intellectual
property rights relating to the Rainbow 21 blackjack game. 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 the New Jersey Gaming Commission. The transfer of each state license is
subject to approval by the applicable state regulatory authority. Each state has
its own application process and the Company, as of the date of this report, has
not applied to any of the states although it intends to intends to pursue
applications for transfer in all three states over the next several months.
Native American Gaming. Native American gaming is regulated under the
Indian Gaming Regulatory Act of 1988 ("IGRA"). 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 generally to regulate gaming activity on Indian lands, provided
"the gaming activity is not specifically prohibited by federal law 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.
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(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. More than two dozen states permit various forms of
Class III gaming pursuant to compacts with Native American
tribes.
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
market the Fortune Poker system in the Native American Tribal Casino and Charity
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 Fortune Poker system as well as the Rainbow 21 game 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.
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<PAGE>
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.
Markets for Gaming Products
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 North American 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. The Fortune
Poker system offers an important advantage over conventional slot machines
because the system is interactive, allowing the player to decide which cards to
hold or discard during the hand. This feature allows the outcome to be
influenced by the player, an attribute unavailable in reel-based slot machines.
In the late 1980's, a category of gaming machines 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. Slot machines, video gaming machines and
similar devices are the dominant source of gaming revenue for casino operators
in most US markets.
Native American Gaming. Native American gaming is regulated under the
Indian Gaming Regulatory Act of 1988 ("IGRA"). 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. Class I gaming includes traditional Native American social and
ceremonial games and is regulated only by the tribes. 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, while 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 and may only be conducted pursuant to a
compact reached between the Native American tribe and the state in which the
tribe is located. At June 30, 1998, the installed base of gaming machines within
Native American operations was approximately 80,000 machines.
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Riverboat Gaming. Riverboat-style gaming began in Iowa during 1991 and
as of September 1998 was operating in six states. In 1998, the riverboat gaming
installed base was estimated at 94,400 games.
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 18,400 gaming machines in place.
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 197,100 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 36,000 gaming machines.
(iii) Canada. Various Canadian provincial governments have approved and
are operating gaming facilities, with an installed base of 124,000 machines. The
following provinces have casino style gambling: Alberta, British Columbia,
Manitoba, Nova Scotia, Ontario, Quebec, Saskatchewan and Yukon. The total
installed base of gaming machines in Canadian casinos at September 30, 1998 was
approximately 17,600.
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 13,600 gaming machines in the cities
of Black Hawk, Central City and Cripple Creek.
International Markets
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.
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.
-13-
<PAGE>
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. 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. The installed base for the Australian market is approximately
156,700 gaming machines in legalized casinos, pubs and clubs.
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.
(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 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 21
licensed casinos in the country, although it is anticipated that as many as
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.
-14-
<PAGE>
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.
Item 2. 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 3. Legal Proceedings.
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. Subsequently, Advanced Gaming
Technology filed for protection under Chapter XI of the United States Bankruptcy
Act and the Company's action is in abeyance. See Note 5 of Notes to Consolidated
Financial Statements.
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<PAGE>
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.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders, through the
solicitations of proxies or otherwise, during the fourth quarter of the fiscal
year ended December 31, 1998.
Item 5. Market for Common Equity and Related Stockholder Matters.
Market Information
The Common Stock is quoted 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 was first quoted. 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-December 31, 1998 .40625 .78125
January 1, 1999-March 31, 1999 .46875 1.15
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 Company has approximately 322 record holders of its Common Stock.
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.
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<PAGE>
(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. (See "Description
of the Business--Business of the Issuer-Material
Acquisitions") These shares were issued as a private offering
under Rule 504 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 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
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").
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<PAGE>
(ix) 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 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.
(x) In March, 1998, the Company issued 150,000 common shares 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").
(xi) In April 1998, pursuant to Subscription Agreements, the
Company issued 17,000 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 net proceeds of $517,500. For these transactions, the
Company relied upon the exemption afforded by Regulation S.
(xii) Through December 31, 1998, the Company issued 959,600 common
shares upon conversion of Series A Preferred Stock; 858,600
common shares upon conversion of Series B Preferred Stock and
601,886 common shares upon conversion of Series C Preferred
Stock. The shares were issued under Rule 504 of Regulation D
of the Securities Act.
(xiii) 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.
(xiv) On April 1, 1998, the Company issued 340,000 common shares to
David B. Jackson and 340,000 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, in each case upon the exercise of certain options, at
$0.30 per share. The company relied upon the exemption
afforded by Section 4(2) of the Securities Act.
(xv) On April 3,1998, the Company issued 200,000 common shares 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.
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<PAGE>
(xvi) In May 1998, the Company issued 22,000 common shares for a
consideration of $24,000. The Company relied upon the
exemption afforded by Section 4(2) of the Securities Act.
(xvii) 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.
(xviii) On May 22, 1998, the Company issued 995,000 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.
(xix) 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.
(xx) 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.")
The company relied upon the exemption afforded by Section 4(2)
of the Securities Act.
(xxi) 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. The Company realized net proceeds of
$750,000 and the Units were issued pursuant to the exemption
afforded by Regulation S under the Securities Act.
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<PAGE>
(xxii) On June 20, 1998, the Company issued 50,000 common shares in
respect of legal services rendered to the Company. The company
relied upon the exemption afforded by Section 4(2) of the
Securities Act.
(xxiii) 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.
(xxiv) On July 27, 1998, the Company issued 50,000 shares to Fortune
Capital Management Inc. upon exercise of options for an
aggregate consideration of $37,500 in a private offering. The
company relied upon the exemption afforded by Section 4(2) of
the Securities Act.
(xxv) On July 28, 1998, the Company issued 150,000 common shares to
Lines Overseas Management Ltd. upon exercise of options for an
aggregate consideration of $112,500 in a private offering. The
Company relied upon the exemption afforded by Section 4(2) of
the Securities Act.
(xxvi) On August 21, 1998, pursuant to an Offshore Subscription
Agreement, the Company issued 433,333 units (each Unit
consisting of one common share and one share purchase warrant
entitling the holder to purchase one additional common share
of the Company's stock at $0.75 per share until August 21,
2000). The Company realized net proceeds of $325,000 and the
Units were issued pursuant to the exemption afforded by
Regulation S under the Securities Act.
(xxvii) On November 18, 1998, pursuant to an Offshore Subscription
Agreement, the Company issued 100,000 units (each Unit
consisting of one common share and one common share purchase
warrant entitling the holder to purchase an additional common
share of the Company at $0.50 per share until November 18,
1999, and thereafter at $0.60 until November 18, 2000. The
Company realized net proceeds of $50,000 and the Units were
issued pursuant to the exemption afforded by Regulation S
under the Securities Act.
(xxviii) In December of 1998, pursuant to Offshore Subscription
Agreements, the Company issued 900,000 Units in seven
transactions, each Unit consisting of one common share and one
common share purchase warrant entitling the holder to purchase
one additional common share of the Company at $0.50 per share
during the first year after the applicable closing and $.60
during the second year after the applicable closing. The
Company realized net proceeds of $450,000 and the Units were
issued in reliance on the exemption afforded by Regulation S
under the Securities Act.
With respect to the sales made in reliance on the exemption afforded by
Section 4(2) of the Securities Act, (i) no advertising or general solicitation
was employed in offering the securities, (ii) the securities were offered to a
limited number of individuals and the transfer thereof was appropriately
restricted by the Company, (iii) all purchasers were sophisticated investors who
were capable of evaluating the merits and risks of the investment and had access
to the type of information that would be included in a registration statement
with respect to the securities and (iv) each purchaser represented that the
securities were acquired for investment and not with a view to re-sale in
contravention of the registration provisions of the Securities Act of 1933.
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 6. Management's Discussion and Analysis or Plan of Operation.
Management's Discussion and Analysis or Plan of Operation.
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<PAGE>
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-KSB.
General
The Company 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.
The Company has incurred a loss of $3,027,209 for the year ended
December 31, 1998. This compares to a loss of $1,456,114 from August 25, 1997
(date of inception) to December 31, 1997. The Company is still a development
stage enterprise and is expected to incur additional losses prior to the
commercialization of its two intellectual properties - Fortune Poker and Rainbow
21. The Company's working capital at December 31, 1998 is not sufficient to meet
its current commitments as they are presently structured. Management recognizes
that the Company must generate additional resources or consider reduction in
operating costs to enable it to continue operation with available resources.
The Company requires working capital on an ongoing basis to fund
current operations. The Company relies from time to time on short-term
borrowings, issuance of notes payable, issuance of convertible promissory notes,
and the issuance of restricted common stock to fund its operating activities.
There are no formal commitments from banks or other lending sources for lines of
credit or similar short-term borrowings, but the Company, as it has done in the
past, intends to continue to meet its capital requirements through these means
on an as-needed basis.
The decrease in liquidity and capital resources during the past year
and one-half reflects the stage of development of the business where the capital
resources have been utilized to acquire and develop assets.
The Company is presently negotiating and investigating a number of
potential sources of financing.
The Company has not, to date, generated any revenues from product
distribution. The Company is seeking to obtain an advisory opinion from the
National Indian Gaming Commission that The Fortune Poker system should be
classified as a Class II activity under the National Indian Gaming Regulatory
Act. The Company believes its business and revenue generating ability would be
significantly improved if the advisory opinion is granted. The Native Indian
gaming market is the initial target market for the Company and the Company
intends to seek to enter into revenue sharing agreements with various Tribal
governing bodies when and if Class II classification is achieved.
The Company's products are subject to state and local gaming laws, as
well as various federal laws and regulations governing business activities with
North American Tribes. The progress that the Company is able to accomplish in
commercializing its technologies and products is a function of the regulatory
process as well as its financing and marketing activities.
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<PAGE>
The Company anticipates it will receive product orders for the Fortune
Poker technology when regulatory approval for the product has been obtained. At
that time, the Company will seek a more conventional form of financing such as
bank lines of credit or product lease financing.
No assurances can be given that the Company will be successful in
obtaining required regulatory approvals or, if successful, that it will be able
to obtain conventional lines of credit or raise additional capital through sales
of common stock. Furthermore, there can be no assurance, assuming the Company
successfully raises additional funds or enters into a business alliance, that
the Company will achieve positive cash flow. If the Company is unable to obtain
adequate additional financing, management will be required to sharply curtail
the Company's operating expenses.
Item 7. Financial Statements.
The financial statements follow Item 13 of this report.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
The Company did not have any changes in or disagreements with its
accountants on accounting and financial disclosure.
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Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
The current executive officers, directors and significant employees of
the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position Or Area of Expertise
- - - ---- --- -----------------------------
<S> <C> <C>
Bryan M. Dear 45 Founding Member of Fortune Entertainment,
Bahamas, Investor Relations.
D. Bruce Horton 54 CFO, Secretary & Director
William M. Danton 44 President, CEO & Director
Roland M. Thomas 49 Chief Operating Officer
</TABLE>
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.
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:
William M. Danton, Chief Executive Officer & Director.
Mr. Danton has been President, Chief Executive Officer and a Director of
the Company since December 11, 1998 and prior thereto since January 1, 1998, was
a consultant to the Company. Mr. Danton was the previous owner of the Fortune
Poker system technology which the Company acquired from Video Lottery
Consultants, Inc. in 1997. He has also been principally employed as Chief
Executive Officer of Old Orchard Beach Associates, one of the largest
hospitality organizations in southern Maine, for more than the past five years.
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.
-23-
<PAGE>
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.
Compliance With Section 16(a) of the Exchange Act.
The Company's registration under the Securities Exchange Act of 1934, as
amended, became effective on December 30, 1998. Accordingly, no reports were
required to be filed under Section 16(a) of the Exchange Act during the year
ended December 31, 1998.
Meetings of the Board of Directors and Information Regarding Committees
The Board of Directors met fifteen times during the last fiscal year and
each director attended all meetings.
-24-
<PAGE>
Item 10. Executive Compensation.
The following table summarizes the aggregate annual remuneration paid
or accrued by the Company to each of the Company's four highest paid executive
officers during the last fiscal year and all officers and directors as a group.
<TABLE>
<CAPTION>
NAME OF INDIVIDUAL CAPACITY IN WHICH AGGREGATE
OR IDENTITY OF GROUP REMUNERATION WAS RECEIVED REMUNERATION
<S> <C> <C>
William M. Danton President, Chief Executive $125,000
Officer, Director &
Consultant
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 $435,000
As a Group (4 persons)
</TABLE>
Mr. Danton was elected President, Chief Executive Officer and a
Director of the Company on December 11, 1998. Prior thereto, he was a consultant
to the Company.
Mr. Jackson resigned as President, Chief Executive Officer and a
Director of the Company on December 11, 1998. Mr. Jackson's services were
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 provided for payment of an annual fee for Mr.
Jackson's services of $125,000 payable in monthly installments. The agreement
has been terminated.
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.
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, 1998:
<TABLE>
<CAPTION>
SHARES
ISSUABLE EXERCISE
UPON PRICE PER EXPIRATION
NAME EXERCISE SHARE DATES
<S> <C> <C> <C>
D. Bruce Horton 300,000 $.90 May 22, 2003
David B. Jackson 300,000 .90 May 22, 2003
William M. Danton 200,000 1.00 June 3, 1999
Roland M. Thomas 200,000 .90 May 22, 2003
Officers & Directors as 1,000,000 $.90-$1.00 -
a Group (4 persons)
</TABLE>
-25-
<PAGE>
The following table summarizes for each of the named executive officers
the total number of unexercised options, if any, held at December 31, 1998, and
the aggregate dollar value of in-the-money, unexercised options, held at
December 31, 1998. The value of the unexercised, in-the-money options at
December 31, 1998, is the difference between their exercise or base price, and
the fair market value of the underlying Common Stock on December 31, 1998. The
closing bid price of the Common Stock on December 31, 1998 was $.65625. All
options held at December 31, 1998 are presently exercisable.
AGGREGATED OPTION EXERCISES -- JANUARY 1, 1998 --
DECEMBER 31, 1998 AND DECEMBER 31, 1998 OPTION VALUES
<TABLE>
<CAPTION>
- - - -------------------------------------------------------------------------------------------------------
Number of
Securities Value of
Underlying Unexercised
Shares Unexercised In-The-Money
Acquired Options/SARs Options/SARs
Upon Value at December at December
Name Exercise Realized 31, 1998 31, 1998
<S> <C> <C> <C> <C>
- - - -------------------------------------------------------------------------------------------------------
D. Bruce Horton 275,000 - 525,000 $80,156
- - - -------------------------------------------------------------------------------------------------------
David B. Jackson 340,000 - 460,000 $57,000
- - - -------------------------------------------------------------------------------------------------------
William M. Danton - 200,000 -
- - - -------------------------------------------------------------------------------------------------------
Roland M. Thomas - - 200,000 -
- - - -------------------------------------------------------------------------------------------------------
</TABLE>
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 report, 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 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.
-26-
<PAGE>
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 11. Security Ownership of Certain Beneficial Owners and Management
Security Ownership of Certain Benefical Owners and Management.
The following table sets forth as of March 31, 1999 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.
Name and Address Amount and Nature of Percent of
Of Beneficial Owner Beneficial Ownership(1) Class(1)
- - - ------------------- ----------------------- -----------
WWT & T Ltd. 995,000 6.62%
Firoz Lakhani (2) 900,000 5.72%
D. Bruce Horton (3) 1,160,000 7.45%
David B. Jackson (4) 988,650 6.38%
Roland M. Thomas (5) 200,000 1.30%
Bryan M. Dear (6) 910,000 5.87%
All Officers and Directors
As a Group (3 persons) 1,360,000 8.63%
(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 and 300,000 shares subject to a common stock purchase option
expiring May 22, 2003, exercisable at a price of $.90 per share.
-27-
<PAGE>
(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 12. Certain Relationships and Related Transactions
Certain officers and directors have each made non-interest bearing
loans or advances to the Company, including deferral of compensation and
expenses, which were outstanding in the following amounts at December 31, 1998:
D. Bruce Horton, $200,981.00, including accrued compensation of $125,000;
William M. Danton, deferred compensation of $125,000 and deferred expenses of
$57,007; David B. Jackson, deferred compensation of $148,000 and deferred
expenses of $45,034; and Firoz Lakhani, deferred management fees of $94,178 and
deferred expenses of $3,273.
Mr. Bryan M. 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.
William B. Danton was a principal owner of Video Lottery Consultants,
Inc., the former owner of the Fortune Poker system which was acquired by the
Company. See Item 1(b) "Business of the Issuer - Material Acquisitions" above.
-28-
<PAGE>
Item l3. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit Description
- - - ------------ -----------
3.1* Articles of Incorporation of Registrant
3.2* By-Laws of the Registrant
3.3* Certificate of Designation, Preferences and Rights of the
Series A Preferred Stock
3.4* Certificate of Designation, Preferences and Rights of the
Series B Preferred Stock
3.5* Certificate of Designation, Preferences and Rights of the
Series C Preferred Stock
10.1* Purchase & Sale Agreement between the Company and Video Lottery
Consultants, Inc. for Professional Video Associates, Inc. dated
September 5, 1997, as amended.
10.2 Amendment Agreement dated March 9, 1999 to Purchase and Sale
Agreement dated September 5, 1997
10.3 Manufacturing Agreement dated as of April 24, 1997, between
Amusement World, Inc. and VLC, Inc.
10.4* Assignment of Manufacturing Agreement dated July 14, 1998
between Video Lottery Consultants, Inc. & Fortune Entertainment
Corporation (Bahamas).
10.5 Amendments dated September 10, 1998 and March 4, 1999, to
Manufacturing Agreement dated as of April 24, 1997.
10.6* Assignment of Software Release Agreement between William M.
Danton & Fortune Entertainment Corporation (Bahamas).
10.7* Letter Agreement between Team Rainbow Inc. and the Company
dated November 19, 1997, as amended.
10.8 Plan of Share Exchange between Fortune Entertainment
Corporation, a Delaware corporation and Fortune Entertainment
Corporation, a Bahama corporation, agreed and accepted the 14th
day of October 1997.
10.9 License Agreement by and between the Company and Sodak Gaming
Corporation
<PAGE>
10.10 Stock Option and Purchase Agreement made the 9th day of April,
1998, by and between Andrew Kaneb, his spouse as to conveyance
of her marital interest, if any, and the Company.
10.11 Lease dated the 17th day of December 1996 between Harwood
Corporation and Fortune Entertainment Corporation relating to
the lease of 2,333 at 543 Granville Street, Vancouver, British
Columbia.
10.12 Lease dated the 9th day of April 1997 between Harwood
Corporation and Fortune Entertainment Corporation relating to
the lease of 1,100 square feet at 543 Granville Street,
Vancouver, British Columbia.
10.13 Consulting Agreement dated March 1, 1997, between Continental
Consulting Inc. and the Company.
10.14 Consulting Agreement dated January 1, 1997, between 555266 B.C.
Ltd. and the Company Continental Consulting Inc. Consulting
Agreement
10.15 Consulting Agreement dated January 1, 1997, between BMD
Financial Inc. and the Company.
10.16 Consulting Agreement dated April 1, 1998, between Moorgate
Management Inc. and the Company.
10.17 1998 Incentive Stock Option Plan
10.18 1998 Stock Bonus Plan
- - - -------------
*Incorporated by reference from the Registrant's Registration Statement on Form
10-SB (File No. 0-23859) effective on December 30, 1998.
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the fiscal
quarter ended December 31, 1998.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated, April 15, 1999
FORTUNE ENTERTAINMENT CORPORATION
By: s/ William M. Danton
--------------------------------
William Danton
Chief Executive Officer
(Principal Executive Officer)
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant on April
15, 1999 in the capacities indicated.
Signatures Title
---------- -----
/s/ William M. Danton President, Chief Executive Officer and a
- - - ---------------------------- Director (Principal Executive Officer)
William Danton
/s/ D. Bruce Horton Chief Financial Officer (Principal
- - - ---------------------------- Financial and Accounting Officer) and
D. Bruce Horton Director
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
FORTUNE ENTERTAINMENT CORPORATION
(A development stage enterprise)
INDEX TO FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS OF FORTUNE ENTERTAINMENT CORPORATION
Audited Financial Statements for the Period from August 19, 1997 to December
31, 1998
Independent Auditors' Report ............................................... F-2
Balance Sheets as at December 31, 1998 and 1997 ............................ F-3
Consolidated Statement of Operations ....................................... F-4
Statement of Stockholders' Equity .......................................... F-5
Statement of Cash Flows .................................................... F-6
Notes to Audited Financial Statements ...................................... F-7
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 (a development stage enterprise) as at December 31,
1998 and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for the year then ended, and for each of the
periods from August 25, 1997 (date of incorporation) to December 31, 1998, and
through 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 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 consolidated financial position of Fortune
Entertainment Corporation at December 31, 1998 and 1997 and the consolidated
results of its operations and its cash flows for the year ended December 31,
1998 and for each of the periods from August 25, 1997 (date of incorporation) to
December 31, 1998 and 1997, in conformity with accounting principles generally
accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company is in the development stage, has no
established source of revenue and is dependent on its ability to raise capital
from shareholders or other sources to sustain operations. These factors, along
with other matters as set forth in Note 1, raise substantial doubt that the
Company will be able to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Ernst & Young LLP
---------------------
Chartered Accountants
Vancouver, Canada,
February 12, 1999.
F-2
<PAGE>
Fortune Entertainment Corporation
(A development stage enterprise)
CONSOLIDATED BALANCE SHEET
(See Basis of Presentation - Note 1)
As at December 31
<TABLE>
<CAPTION>
1998 1997
$ $
- - - --------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current
Cash 353,543 41,890
Accounts receivable 22,423 28,183
Prepaid expenses and other current assets 8,598 22,496
- - - --------------------------------------------------------------------------------------------------
Total current assets 384,564 92,569
- - - --------------------------------------------------------------------------------------------------
Deposits 9,879 10,000
Investments [note 5] 1,183,751 1
Property and equipment, net [note 6] 90,978 67,807
Goodwill, net of accumulated amortization of $74,624
[1997 - $13,278] [note 3[a]] 538,836 600,182
Intellectual Property, net of accumulated amortization of
$594,198 [1997 - nil] [notes 3[b], 3[c], 4[a] and 4 [b]] 5,547,789 5,106,986
- - - --------------------------------------------------------------------------------------------------
7,755,797 5,877,545
- - - --------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities 604,704 75,790
Due to related parties [note 7[b]] 595,980 360,256
Loans payable [note 8] 470,000 334,671
Purchase consideration payable [notes 3[b], [c] and [d]] 923,750 1,906,986
- - - --------------------------------------------------------------------------------------------------
Total current liabilities 2,594,434 2,677,703
- - - --------------------------------------------------------------------------------------------------
Purchase consideration payable [notes 3[b], [c] and [d]] 231,250 1,433,014
- - - --------------------------------------------------------------------------------------------------
Total liabilities 2,825,684 4,110,717
- - - --------------------------------------------------------------------------------------------------
Commitments and contingencies [notes 1, 3, 4, and 12]
Stockholders' equity
Share stock [note 9]
Common stock, $0.0001 par value 1,393 427
30,000,000 authorized, 13,925,256 issued and outstanding
Preferred Stock, $0.0001 par value, convertible 85 327
For each of Class A, B and C Preferred Stock:
1,100,000 authorized: 130,864, 231,864, 488,578 issued
and outstanding respectively [1997 - 1,090,464 for all
classes]
Additional paid in capital 9,017,958 1,547,188
Share stock to be issued [notes 9[c] and 13] 210,000 1,675,000
Stock based compensation [note 11] 465,000 --
Accumulated deficit (4,764,323) (1,456,114)
- - - --------------------------------------------------------------------------------------------------
Total stockholders' equity 4,930,113 1,766,828
- - - --------------------------------------------------------------------------------------------------
7,755,797 5,877,545
- - - --------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
On behalf of the Board:
Director Director
/s/ William M. Danton /s/ D. Bruce Horton
F-3
<PAGE>
Fortune Entertainment Corporation
(A development stage enterprise)
CONSOLIDATED STATEMENT OF OPERATIONS
Period ended December 31
<TABLE>
<CAPTION>
Period from Period from
Year August 25, 1997 August 25, 1997
ended (inception) to (inception) to
December 31, December 31, December 31,
1998 1997 1998
$ $ $
- - - ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
EXPENSES
Amortization of intangible assets 655,543 13,278 668,821
Bank charges and interest 106,138 8,047 114,185
Depreciation 18,163 4,310 22,473
Foreign exchange (gain) loss (2,795) 4,681 1,886
General and administration 115,908 21,562 137,470
Legal and accounting 308,622 59,654 368,276
Management fees [note 7[a]] 319,103 126,050 445,153
Office and miscellaneous 376,822 18,134 394,956
Consulting fees 709,850 45,161 755,011
Rent [note 7[a]] 63,003 8,515 71,518
Salaries and wages 66,834 34,711 101,545
Stock based compensation [note 11] 465,000 -- 465,000
Travel, promotion and entertainment 106,018 77,998 184,016
- - - ------------------------------------------------------------------------------------------------------------
3,308,209 422,101 3,730,310
- - - ------------------------------------------------------------------------------------------------------------
Loss before the following: (3,308,209) (422,101) (3,730,310)
Investment valuation reserve [note 5] -- (1,034,013) (1,034,013)
- - - ------------------------------------------------------------------------------------------------------------
Loss for period (3,308,209) (1,456,114) (4,764,323)
- - - ------------------------------------------------------------------------------------------------------------
Deficit, beginning of period (1,456,114) -- --
- - - ------------------------------------------------------------------------------------------------------------
Deficit, end of period (4,764,323) (1,456,114) (4,764,323)
- - - ------------------------------------------------------------------------------------------------------------
Basic and diluted loss per share [note 9[h]] (0.36) (1.26) --
- - - ------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
F-4
<PAGE>
Fortune Entertainment Corporation
(A development stage enterprise)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
December 31, 1998
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
NUMBER NUMBER PAID-IN ACCUMULATED
OF SHARES AMOUNT OF SHARES AMOUNT CAPITAL DEFICIT
# $ # $ $ $
- - - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 -- -- -- -- -- --
Issuance of common stock [note 9[b]] 4,265,920 427 -- -- 390,523
Common stock to be issued
Issuance of preferred stock 3,271,392 327 1,156,665
[note 9[b]]
Loss for the period (1,456,114)
- - - ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 4,265,920 427 3,271,392 327 1,547,188 (1,456,114)
Issuance of common stock [note 9[b]] 7,239,250 724 7,470,770
Conversion of preferred stock
[note 9[b]] 2,420,086 242 (2,420,086) (242)
Common stock to be issued [note 9[c]]
Stock based compensation [note 11]
Loss for the period (3,308,209)
- - - ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 13,925,256 1,393 851,306 85 9,017,958 (4,764,323)
- - - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
STOCK BASED COMMON SHARES
COMPENSATION TO BE ISSUED TOTAL
$ $ $
- - - ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, December 31, 1996 -- --
Issuance of common stock [note 9[b]] -- 390,950
Common stock to be issued 1,675,000 1,675,000
Issuance of preferred stock [note 1,156,992
9[b]]
Loss for the period (1,456,114)
- - - ----------------------------------------------------------------------------------
Balance, December 31, 1997 1,675,000 1,766,828
Issuance of common stock [note 9[b]] (1,675,000) 5,796,494
Conversion of preferred stock
[note 9[b]] --
Common stock to be issued [note 9[c]] 210,000 210,000
Stock based compensation [note 11] 465,000 465,000
Loss for the period (3,308,209)
- - - ----------------------------------------------------------------------------------
Balance, December 31, 1998 465,000 210,000 4,930,113
- - - ----------------------------------------------------------------------------------
</TABLE>
See accompanying notes
F-5
<PAGE>
Fortune Entertainment Corporation
(A development stage enterprise)
CONSOLIDATED STATEMENT OF CASH FLOWS
Period ended December 31
<TABLE>
<CAPTION>
Period from
August 25, Period from
Year 1997 August 25, 1997
ended (inception) (inception)
December 31, to December 31, to December 31,
1998 1997 1998
$ $ $
- - - --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss for period (3,308,209) (1,456,114) (4,764,323)
Adjustments to reconcile net loss to net cash used
in operating activities:
Amortization of intangible assets 655,543 13,278 668,821
Depreciation 18,163 4,310 22,473
Investment valuation reserve -- 1,034,013 1,034,013
Stock based compensation [note 11] 465,000 -- 465,000
Shares issued, or to be issued, for services 210,020 -- 210,020
Changes in operating assets and liabilities:
Accounts receivable 5,760 (10,915) (5,155)
Prepaid expenses, deposits and other current 4,019 (12,373) (8,354)
assets
Accounts payable and accrued liabilities 857,914 52,310 910,224
- - - --------------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,091,790) (375,491) (1,467,281)
- - - --------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Acquisition of property and equipment (41,334) (6,017) (47,351)
Acquisition of investments (1,071,250) (44,014) (1,115,264)
Purchase price consideration payable (350,000) -- (350,000)
Businesses acquisitions, net of cash acquired (12,500) (18,850) (31,350)
- - - --------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,475,084) (68,881) (1,543,965)
- - - --------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from capital contributions 2,147,900 5,285 2,418,185
Shares subscriptions received 150,000 265,000 150,000
Borrowings under loans payable 262,403 84,671 347,074
Advances from related parties 318,224 131,306 449,530
- - - --------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,878,527 486,262 3,364,789
- - - --------------------------------------------------------------------------------------------------------
Net increase in cash during the period 311,653 41,890 353,543
Cash at beginning of period 41,890 -- --
- - - --------------------------------------------------------------------------------------------------------
Cash at end of period 353,543 41,890 353,543
- - - --------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
F-6
<PAGE>
Fortune Entertainment Corporation
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
1. NATURE OF BUSINESS AND LIQUIDITY
Fortune Entertainment Corporation, a Delaware corporation (the "Company"), was
incorporated on August 25, 1997. On September 16, 1997, the Company acquired all
of the issued and outstanding share stock 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.
F-7
<PAGE>
Fortune Entertainment Corporation
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
1. NATURE OF BUSINESS AND LIQUIDITY (continued)
The Company's financial statements for the year ended December 31, 1998 have
been prepared on a going concern basis which contemplates the realization of
assets and the settlement of liabilities and commitments in the normal course of
business for the foreseeable future. The company incurred a loss of $3,308,209
for the year ended December 31, 1998, and as of December 31, 1998 had a working
capital deficiency of $2,209,870. The Company is still a development stage
enterprise and is expected to incur substantial losses and expenditures prior to
the commencement of full-scale operations in future years. The Company's working
capital at December 31, 1998 will not be sufficient to meet such commitments.
Management recognizes that the Company must obtain additional financial
resources or consider a reduction in operating costs to enable it to continue
operations with available resources and to commercialize its investments in the
intellectual properties and patents relating to its two major projects - Rainbow
21 and Fortune Poker. The Company is pursuing licensing approvals for its
technologies in various US states. In addition to the development of its current
technologies, the Company is evaluating opportunities that would generate
immediate cash flow for the Company. Management expects that these efforts will
result in the introduction of other parties with interests and resources.
However, no assurances can be given that the Company will be successful in
raising additional capital. Further, there can be no assurance, assuming the
Company successfully raises additional funds or enters into a business alliance,
that the Company will achieve positive cash flow. If the Company is unable to
obtain adequate additional financing or enter into such business alliance,
management will be required to sharply curtail the Company's operating expenses.
Accordingly, the company's continuation as a going concern is in substantial
doubt.
These financial statements do not include any adjustments to the carrying values
and classification of assets and liabilities which may be necessary if the
company is unable to continue its operations.
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 Fortune Poker,
Inc. (Delaware) (formerly known as Professional Video Association, Inc.).
F-8
<PAGE>
Fortune Entertainment Corporation
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 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. The investment in Sega Gaming Technology, Inc., a private company,
is recorded at cost as it is not possible to reasonably determine market value.
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.
Advertising costs
Advertising costs are expensed as incurred.
F-9
<PAGE>
Fortune Entertainment Corporation
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
Intellectual Property, consisting of Fortune Poker and Rainbow 21, is amortized
on a straight-line basis over ten years.
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 [see Note 9[g]].
Computation of 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. As at December
31, 1998 and 1997, the diluted loss per share will be equivalent to the basic
loss per share since the company is in a loss position.
F-10
<PAGE>
Fortune Entertainment Corporation
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
3. BUSINESS ACQUISITIONS
[a] Fortune Entertainment Corporation (Bahamas)
On October 14, 1997 the Company acquired all of the issued and outstanding share
stock of Fortune Entertainment Corporation (Bahamas), ("FECB"), for the
following consideration:
<TABLE>
<CAPTION>
# of shares $
- - - --------------------------------------------------------------------------------------------------
<S> <C> <C>
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
- - - --------------------------------------------------------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
$
- - - --------------------------------------------------------------------------------------------------
<S> <C>
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
Fortune Poker [notes 3[b] and 4[a]] 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>
F-11
<PAGE>
Fortune Entertainment Corporation
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
3. BUSINESS ACQUISITIONS (continued)
[b] Fortune Poker, Inc. (formerly known as 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 acquired all of the remaining issued share stock of Fortune
Poker, Inc. (Fortune Poker), formerly known as Professional Video Association,
Inc. ("PVA"). Fortune Poker 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 Intellectual Property [see Note 4 [a]]. Details of this acquisition
are as follows:
<TABLE>
<CAPTION>
# of shares $
- - - --------------------------------------------------------------------------------------------------
<S> <C> <C>
Purchase price 5,106,986
- - - --------------------------------------------------------------------------------------------------
Consideration:
Investment in Fortune Poker acquired in the FECB acquisition
[note 3[a]] 321,986
Cash paid to December 31, 1997 pursuant to the Agreement 35,000
- - - --------------------------------------------------------------------------------------------------
Sub-total 356,986
- - - --------------------------------------------------------------------------------------------------
Cash payments due 3,340,000
Common shares to be issued 705,000 1,410,000
- - - --------------------------------------------------------------------------------------------------
5,106,986
- - - --------------------------------------------------------------------------------------------------
</TABLE>
All of the common shares have, and are, to be issued at an ascribed value of
$2.00 per share, that being the guaranteed amount pursuant to the
"top-up-Provision" and accounted for pursuant to Emerging Issues Task Force
Abstract 97-15.
F-12
<PAGE>
Fortune Entertainment Corporation
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
3. BUSINESS ACQUISITIONS (continued)
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.
During the year ended December 31, 1998, the Company elected to settle a portion
of the cash payments due by issuing 1,142,500 shares valued at $2.00 per share
in addition to the 705,000 shares issued pursuant to the original purchase
agreement. Of the remaining balance due, $705,000 is outstanding at December 31,
1998. The company amended the Agreement and has paid an additional $140,000 fee,
and agreed to issue 100,000 common shares of the Company for, this amendment.
These amounts, aggregating $200,000, have been expensed and are included in
office and miscellaneous. The details of the amended Agreement are as follows:
<TABLE>
<CAPTION>
$
- - - --------------------------------------------------------------------------------------------------
<S> <C>
Cash payments due:
January 7, 1999 200,000
June 10, 1999 250,000
August 10, 1999 255,000
- - - --------------------------------------------------------------------------------------------------
Total 705,000
- - - --------------------------------------------------------------------------------------------------
</TABLE>
The acquisition of Fortune Poker included the assumption of a Manufacturing
Agreement dated April 24, 1997 with Amusement World, Inc. to have them
manufacture Fortune Poker terminals. The original agreement has been amended.
The term of the amended agreement is April 24, 1998 to April 23, 2008 and
Fortune Poker is committed to placing purchase orders for a minimum of 333
Fortune Poker terminals per year during the first three years of this agreement.
F-13
<PAGE>
Fortune Entertainment Corporation
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
3. BUSINESS ACQUISITIONS (continued)
[c] Team Rainbow, Inc.
Pursuant to an Asset Acquisition Agreement (the "Agreement") effective July 31,
1998, with Team Rainbow Inc. ("TRI"), the Company purchased all of the rights,
assets and business of TRI for the following consideration:
<TABLE>
<CAPTION>
# of shares $
- - - --------------------------------------------------------------------------------------------------
<S> <C> <C>
Purchase price 1,035,000
- - - --------------------------------------------------------------------------------------------------
Consideration given:
Cash 22,500
Cash consideration due:
by July 31, 1999 50,000
by July 31, 2000 150,000
by July 31, 2002 250,000
Common shares issued July 31, 1998 250,000 562,500
- - - --------------------------------------------------------------------------------------------------
1,035,000
- - - --------------------------------------------------------------------------------------------------
</TABLE>
The Company paid $22,500 in cash and agreed to pay a total of $250,000 in equal
quarterly installments over the four year period ending July 31, 2002. In
addition, as noted in Note 4[b][ii] and [iii], a further minimum amount of
$200,000 is required to be paid by July 31, 2000.
TRI holds a patent on a multi-positional blackjack game known as "Rainbow 21".
All of the common shares were issued at an ascribed value of $2.25 per share
being the guaranteed amount pursuant to Note 4[b][i] and accounted for pursuant
to Emerging Issues Task Force Abstract 97-15. Of the cash balance due, $450,000
is outstanding at December 31, 1998. The entire purchase price has been
allocated to the Intellectual Property [see Note 4[b]].
F-14
<PAGE>
Fortune Entertainment Corporation
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
3. BUSINESS ACQUISITIONS (continued)
[d] Purchase consideration payable
The following table details the payment schedule for purchase consideration
payable for Fortune Poker and TRI.
<TABLE>
<CAPTION>
$
- - - --------------------------------------------------------------------------------------------------
<S> <C>
Cash payable and shares issuable [notes 3[b] and [c]]
- - - --------------------------------------------------------------------------------------------------
Cash and share consideration due:
by December 31, 1999 923,750
by December 31, 2000 137,500
by December 31, 2001 62,500
by December 31, 2002 31,250
- - - --------------------------------------------------------------------------------------------------
1,155,000
- - - --------------------------------------------------------------------------------------------------
</TABLE>
4. INTELLECTUAL PROPERTY
Intellectual property consists of the patented software inventions discussed in
Notes 3[b] and 3[c] known respectively as Fortune Poker and Rainbow 21.
[a] Fortune Poker
To the extent that the Company sub-licenses rights derived from Fortune 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.
F-15
<PAGE>
Fortune Entertainment Corporation
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
4. INTELLECTUAL PROPERTY(continued)
Any payments made to pursuant to the above will be recorded as additional
consideration.
Until the Company meets all of the above obligations in a timely manner, the
Fortune Poker stock [see Note 3[b]] is subject to a Stock Pledge Agreement
whereby Mr. Danton has been granted a security interest in 60% of the issued and
outstanding Fortune Poker 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 Fortune Poker stock upon default of
this Agreement by the Company at a price equivalent to that paid by the Company.
[b] Rainbow 21
Pursuant to the TRI acquisition as discussed in Note 3[c], the Company has the
following obligations:
[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 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.
[iii] 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.
[iv] 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. The minimum payments under [ii] to [iv] above have been
recorded as consideration payable. Any further payments will be recorded as
additional consideration. The entire purchase price has been allocated to
Intellectual Property.
F-16
<PAGE>
Fortune Entertainment Corporation
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
F-17
<PAGE>
Fortune Entertainment Corporation
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
5. INVESTMENTS
Investments consist of the following:
<TABLE>
<CAPTION>
1998 1997
$ $
- - - --------------------------------------------------------------------------------------------------
<S> <C> <C>
Sega Gaming Technology, Inc. (Note 8) 1,183,750 --
Advanced Gaming Technology, Inc. 1,034,014 1,034,014
Less valuation reserve (1,034,013) (1,034,013)
- - - --------------------------------------------------------------------------------------------------
1,183,751 1
- - - --------------------------------------------------------------------------------------------------
</TABLE>
Sega Gaming Technology, Inc. ("SGT") was a subsidiary of the parent Sega (Japan)
which subsequently underwent a management buyout. The investment in SGT is the
company's first initiative to form a joint venture company with SGT in the
future, whereby the Company will market its technology under SEGA's brand name.
Advanced Gaming Technology, Inc. ("AGT") was engaged in the business of
designing and developing electronic bingo products. During the year, AGT filed
for chapter 11 bankruptcy protection in the state of Nevada.
F-18
<PAGE>
Fortune Entertainment Corporation
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------
Accumulated
Cost depreciation
$ $
- - - -----------------------------------------------------------------------------------------------
<S> <C> <C>
Furniture and equipment 94,487 14,765
Computer equipment and software 12,381 5,638
Leasehold improvements 6,251 1,738
- - - -----------------------------------------------------------------------------------------------
113,119 22,141
- - - -----------------------------------------------------------------------------------------------
90,978
- - - -----------------------------------------------------------------------------------------------
December 31, 1998
-----------------------------------
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
- - - -----------------------------------------------------------------------------------------------
</TABLE>
7. RELATED PARTY TRANSACTIONS
[a] Management fees of $319,103 [1997 - $126,050] and rent, utilities and office
and miscellaneous costs of $57,007 [1997 - $4,000] were charged during the
year by companies controlled by directors.
[b] The amounts due to related parties consist of advances from, and unpaid
management fees and other costs (as above) charged by, companies controlled
by directors. These amounts are without interest or stated terms of
repayment.
F-19
<PAGE>
Fortune Entertainment Corporation
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
8. LOANS PAYABLE
Loans payable consist of the following:
<TABLE>
<CAPTION>
1998 1997
$ $
- - - --------------------------------------------------------------------------------------------------
<S> <C> <C>
B. Benedet Holdings Inc., due on demand with interest
at 10% per annum 320,000 200,000
Caulfield Management Ltd., due June 30, 1999, with interest
at 12% 150,000 --
Internet TV Corporation, due on demand without interest -- 48,849
Clearly Advanced Holdings Ltd., with interest at
10% per annum -- 85,822
- - - --------------------------------------------------------------------------------------------------
470,000 334,671
- - - --------------------------------------------------------------------------------------------------
</TABLE>
Interest paid during the year ended December 31, 1998 amounted to $32,540 [1997
- - - - $10,815].
As collateral for the Caulfield Management Ltd. loan the Company has assigned a
portion of the shares of Sega Gaming Technology, Inc.
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
were 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.
F-20
<PAGE>
Fortune Entertainment Corporation
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
9. SHARE STOCK (continued)
[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
---------------------------------------------------------------------------------------------
Balance at December 31, 1997 4,265,920 390,950
Issued for cash
Pursuant to private placement 179,000 309,400
Pursuant to unit offering [note 9[i]] 2,923,333 2,017,500
Pursuant to exercise of stock options and warrants 200,000 150,000
Conversion of Series A Preferred Shares 959,600 339,381
Conversion of Series B Preferred Shares 858,600 303,661
Conversion of Series C Preferred Shares 601,886 212,869
Issued pursuant to exercise of stock options and
warrants for settlement of debt [note 9[j]] 955,000 286,500
Issued as partial consideration for TRI [note 3[c]] 250,000 562,500
Issued related to Fortune Poker acquisition [note 3[b]] 1,847,500 3,695,000
Issued as partial consideration for SGT investment
[note 9[j]] 150,000 112,500
Shares issued as signing bonus [note 9[j]] 200,000 150,020
Shares issued for settlement of accounts payable
[note 9[j]] 87,500 125,000
Shares issued for settlement of loan [note 9[j]] 446,917 127,074
Commissions on share issuance -- (64,000)
---------------------------------------------------------------------------------------------
Balance, December 31, 1998 13,925,256 8,718,355
---------------------------------------------------------------------------------------------
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
Shares converted to common shares (959,600) (339,381)
---------------------------------------------------------------------------------------------
Balance, December 31, 1998 130,864 46,283
---------------------------------------------------------------------------------------------
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
Shares converted to common shares (858,600) (303,661)
---------------------------------------------------------------------------------------------
Balance, December 31, 1998 231,864 82,003
---------------------------------------------------------------------------------------------
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
Shares converted to common shares (601,886) (212,869)
---------------------------------------------------------------------------------------------
Balance, December 31, 1998 488,578 172,795
---------------------------------------------------------------------------------------------
Total Preferred stock, December 31, 1998 851,306 301,081
---------------------------------------------------------------------------------------------
</TABLE>
F-21
<PAGE>
Fortune Entertainment Corporation
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
9. SHARE STOCK (continued)
[c] As at December 31, 1998, the Company had received cash in the amount of
$150,000 representing subscriptions received for the issue of 300,000 common
shares and 300,000 common share purchase warrants. In addition, pursuant to
the amended agreement referred to in Note 3[b], the Company is required to
issue 100,000 common shares at a value of $60,000.
[d] During the year ended December 31, 1998, the Company established an
Incentive Stock Option and a Stock Bonus Plan pursuant to which 5,500,000
common shares were reserved in issuance. At December 31, 1998 no options
have been granted under these plans. The option and stock bonus plans are
subject to shareholder approval.
[e] Stock option transactions for the respective periods and the number of stock
options outstanding are summarized as follows:
<TABLE>
<CAPTION>
No. of common
shares issuable
---------------------------------------------------------------------------------------------
<S> <C>
Options granted in 1997 1,050,000
---------------------------------------------------------------------------------------------
Balance, December 31, 1997 1,050,000
Options granted 3,755,000(i)
Options exercised (815,000)
Options expired (100,000)
---------------------------------------------------------------------------------------------
Balance, December 31, 1998 3,890,000
---------------------------------------------------------------------------------------------
</TABLE>
[i] All options issued are subject to shareholder approval at the Company's
annual general meeting.
F-22
<PAGE>
Fortune Entertainment Corporation
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
9. SHARE STOCK (continued)
At December 31, 1998, the following options were outstanding:
<TABLE>
<CAPTION>
No. of common Exercise price
shares issuable $ Date of expiry
-----------------------------------------------------------------------------------------------
<S> <C> <C>
435,000 0.30 October 14, 2002
1,425,000 0.90 May 22, 2003
335,000 1.00 June 3, 1999
50,000 0.80 June 1, 1999
200,000 (i) 1.50 May 14, 1999
200,000 (i) 2.00 May 14, 1999
200,000 (i) 2.50 November 14, 1999
200,000 (i) 3.00 May 14, 2000
600,000 0.75 Option in full force until termination of consulting
agreement
145,000 1.15 June 5, 1999- July 19, 2000
50,000 [ii] 1.25 March 12, 1999
50,000 [ii] 1.50 June 12, 1999
-----------------------------------------------------------------------------------------------
3,890,000
-----------------------------------------------------------------------------------------------
</TABLE>
Stock options become exercisable at dates determined by the Board of
Directors at the time of the granting of the option. At December 31, 1998,
2,920,000 options were exercisable.
[i] These options are only exercisable if, on the date of exercise, the
share price is at least twice the exercise price.
[ii] These options are only exercisable if, prior to the expiry of these
options, the share price closes for ten consecutive days at a minimum
price of $3.50 and 3.00 respectively.
F-23
<PAGE>
Fortune Entertainment Corporation
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
9. SHARE STOCK (continued)
[f] At December 31, 1998 common share purchase warrants outstanding were as
follows:
<TABLE>
<CAPTION>
Exercise
No. of common price
shares issuable $ Date of expiry
---------------------------------------------------------------------------------------------
<S> <C> <C>
400,000 0.35 April 1, 2003
160,000 0.30 December 31, 2001
1,123,333 0.75 March 31, 1999 - August 2, 2000
100,000 0.75 - 0.90 May 20, 1999 - May 20, 2000
300,000 0.75 - 0.85 June 11, 1999 - June 11, 2000
700,000 0.75 - 0.85 July 7, 1999 - July 7, 2000
700,000 0.50 - 0.60 November 18, 1999 - December 18, 2000
---------------------------------------------------------------------------------------------
</TABLE>
During the period, 340,000 warrants were exercised.
[g] 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 for stock options issued to employees. 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>
1998 1997
$ $
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loss As reported (3,308,209) (1,456,114)
Pro forma (4,568,709) (2,634,114)
Basic and diluted loss per share As reported (0.36) (1.26)
Pro forma (0.49) (2.29)
---------------------------------------------------------------------------------------------
</TABLE>
The fair value of each option or warrant granted in 1997 was 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 five years. The fair value for 1998 options and
grants were estimated at the date of grant using a Black-Scholes pricing
model with the following weighted average assumptions: risk free interest
rates of 5.05%; dividend yields of 0%; volatility factors of the expected
market price of the company's common stock of 1.234 and a weighted average
expected life of the option of 2.6 years.
F-24
<PAGE>
Fortune Entertainment Corporation
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
9. SHARE STOCK (continued)
The Black Scholes options valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's option, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
The weighted-average fair value of options granted during the year where
the stock price is equal to the exercise price of the options was $0.60
[1997 - nil]; when the stock price is greater than the exercise price of
the options, the weighted -average fair value is $0.63 [1997 - $0.93].
Accordingly, the respective weighted average exercise price of options
granted during the year was $0.92 and $0.60 [1997 - nil, $0.30].
[h] The basic and diluted loss per share for the period ended December 31 is
based on the following:
<TABLE>
<CAPTION>
August 25, 1997
to
December 31, 1998 December 31, 1997
$ $
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Net loss for the period (3,308,209) (1,456,114)
Weighted average number of common shares used
in computation 9,241,847 1,152,484
Basic and diluted loss per share (0.36) (1.26)
-----------------------------------------------------------------------------------------------
</TABLE>
[i] During the year ended December 31, 1998 the Company issued 2,923,333
warrants for $2,017,500. Each unit comprised one common share and one share
purchase warrant entitling the holder to acquire one common share for $0.50
to $0.90 per common share to various dates to December 18, 2000.
[j] During the year the company settled management and consulting fees payable
of $286,500 by offsetting the $0.30 exercise price per option on 955,000
options against the related payables; similarly, the company issued 150,000
shares valued at $0.75 in partial payment for its investment in SGT,
200,000 shares valued at $0.75 each were issued as a signing bonus, and
87,500 and 446,917 shares were issued to settle accounts and loans payable
respectively.
F-25
<PAGE>
Fortune Entertainment Corporation
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
10. INCOME TAXES
At December 31, 1998, the Company has a U.S. tax net operating loss
approximating $3,040,000, 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 approximately $569,000
resulting from operations in Canada. Of these losses, $130,000 will expire in
2004 and $439,000 in 2005.
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:
<TABLE>
<CAPTION>
$
- - - --------------------------------------------------------------------------------------------------
<S> <C>
Deferred tax assets:
Net operating loss carryforwards 1,233,000
Depreciation/amortization 16,000
Other 21,000
- - - --------------------------------------------------------------------------------------------------
Total deferred tax assets 1,270,000
Total deferred tax liabilities --
- - - --------------------------------------------------------------------------------------------------
Net deferred tax assets 1,270,000
Valuation allowance (1,270,000)
- - - --------------------------------------------------------------------------------------------------
Net deferred taxes --
- - - --------------------------------------------------------------------------------------------------
</TABLE>
11. STOCK BASED COMPENSATION
During the year ended December 31, 1998, the Company recorded stock based
compensation expense of $465,000 relating to investor relations and other
activities provided by consultants.
F-26
<PAGE>
Fortune Entertainment Corporation
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
12. COMMITMENTS AND CONTINGENCIES
Commitments
The company has the following future minimum lease commitments for premises and
equipment:
<TABLE>
<CAPTION>
$
- - - --------------------------------------------------------------------------------------------------
<S> <C>
1999 70,187
2000 66,215
2001 64,761
2002 13,443
- - - --------------------------------------------------------------------------------------------------
214,606
- - - --------------------------------------------------------------------------------------------------
</TABLE>
Contingencies
Through the normal course of operations, the Company is party to litigation,
claims and contingencies. Accruals are made in instances where it is probable
that liabilities will be incurred and where such liabilities can be reasonably
estimated. Although it is possible that liabilities may be incurred in instances
for which no accruals have been made, the Company has no reason to believe that
the ultimate outcome of these matters will have a material impact on its
financial position.
13. SUBSEQUENT EVENTS
Subsequent to year end, a total of 11,000 Series B and 316,214 Series C
Preferred Shares were converted into common shares.
300,000 common shares and 300,000 common share purchase warrants were issued
subsequent to year end pursuant to the share subscriptions received [Note 9[c]].
In addition, 420,000 common shares and warrants to acquire 420,000 common shares
at $0.50 - $0.60 were issued for $210,000.
14. COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform with the
presentation adopted in the current year.
F-27
<PAGE>
INDEX TO EXHIBITS
Exhibit Description
- - - ------------ -----------
3.1* Articles of Incorporation of Registrant
3.2* By-Laws of the Registrant
3.3* Certificate of Designation, Preferences and Rights of the
Series A Preferred Stock
3.4* Certificate of Designation, Preferences and Rights of the
Series B Preferred Stock
3.5* Certificate of Designation, Preferences and Rights of the
Series C Preferred Stock
10.1* Purchase & Sale Agreement between the Company and Video Lottery
Consultants, Inc. for Professional Video Associates, Inc. dated
September 5, 1997, as amended.
10.2 Amendment Agreement dated March 9, 1999 to Purchase and Sale
Agreement dated September 5, 1997
10.3 Manufacturing Agreement dated as of April 24, 1997, between
Amusement World, Inc. and VLC, Inc.
10.4* Assignment of Manufacturing Agreement dated July 14, 1998
between Video Lottery Consultants, Inc. & Fortune Entertainment
Corporation (Bahamas).
10.5 Amendments dated September 10, 1998 and March 4, 1999, to
Manufacturing Agreement dated as of April 24, 1997.
10.6* Assignment of Software Release Agreement between William M.
Danton & Fortune Entertainment Corporation (Bahamas).
10.7* Letter Agreement between Team Rainbow Inc. and the Company
dated November 19, 1997, as amended.
10.8 Plan of Share Exchange between Fortune Entertainment
Corporation, a Delaware corporation and Fortune Entertainment
Corporation, a Bahama corporation, agreed and accepted the 14th
day of October 1997.
10.9 License Agreement by and between the Company and Sodak Gaming
Corporation
<PAGE>
10.10 Stock Option and Purchase Agreement made the 9th day of April,
1998, by and between Andrew Kaneb, his spouse as to conveyance
of her marital interest, if any, and the Company.
10.11 Lease dated the 17th day of December 1996 between Harwood
Corporation and Fortune Entertainment Corporation relating to
the lease of 2,333 at 543 Granville Street, Vancouver, British
Columbia.
10.12 Lease dated the 9th day of April 1997 between Harwood
Corporation and Fortune Entertainment Corporation relating to
the lease of 1,100 square feet at 543 Granville Street,
Vancouver, British Columbia.
10.13 Consulting Agreement dated March 1, 1997, between Continental
Consulting Inc. and the Company.
10.14 Consulting Agreement dated January 1, 1997, between 555266 B.C.
Ltd. and the Company Continental Consulting Inc. Consulting
Agreement
10.15 Consulting Agreement dated January 1, 1997, between BMD
Financial Inc. and the Company.
10.16 Consulting Agreement dated April 1, 1998, between Moorgate
Management Inc. and the Company.
10.17 1998 Incentive Stock Option Plan
10.18 1998 Stock Bonus Plan
- - - -------------
*Incorporated by reference from the Registrant's Registration Statement on Form
10-SB (File No. 0-23859) effective on December 30, 1998.
<PAGE>
Video Lottery Consultants, Inc.
144 Elm Street, 2nd Floor
Suite 16
Biddeford, Maine 04005
March 9, 1999
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 Sirs:
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, March 12, 1998, and July 9, 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. Section 2.2(d) of the Agreement provides for the following cash
payments, subject to other terms and conditions contained therein:
US $250,000 on or before Oct. 30, 1998;
US $250,000 on or before Dec. 30, 1998; and
US $205,000 on or before Mar. 30, 1999;
-----------
Total US $705,000
It is now hereby acknowledged and agreed that, in consideration of Fortune
Entertainment ("FECD") having paid Mr. Danton US $140,000 on or about October
14, 1998, the receipt and acceptance of which is hereby acknowledged,
Professional Video Association, Inc., has accepted the following revised terms
of the above noted cash payments:
o US $200,000 paid on January 7, 1999, the acceptance and receipt of which
is hereby acknowledged;
o US $250,000 shall be due and payable on or before June 10, 1999;
o US $255,000 shall be due and payable on or before August 10, 1999; and
o In further consideration of our agreement to modify the Agreement, FEC
shall issue to us 100,000 of its common shares. These shares shall be
included in the registration statement which FEC is in the process of
filing.
2. It is further agreed and accepted that the registration statement is in
preparation and certain factors beyond the control of FEC have caused an
inevitable delay. However, FEC will continue to exercise its best effort to have
this document filed by April 30, 1999.
3. 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.
4. 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 having this letter
signed by a duly authorized officer of FECB and FECD 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.
Thanking you for your kind cooperation.
Very truly yours,
/s/ William M. Danton
-----------------------------
William M. Danton, on behalf of himself
and Video Lottery Consultants, Inc.
<PAGE>
April 18, 1997
MANUFACTURING AGREEMENT
THIS MANUFACTURING AGREEMENT (this "Agreement"), dated as of April 24,
1997, is by and between AMUSEMENT WORLD, INC., a Maryland corporation with a
place of business at 5617 Baltimore National Pike, Baltimore, Maryland (the
"Manufacturer"), and VLC, INC., a Maine corporation with a place of business at
144 Elm Street, 2nd Floor, Suite 16, Biddeford, Maine ("VLC");
W I T N E S S E T H
WHEREAS, Manufacturer is engaged in the manufacture, production, and
sale of PVA amusement terminals and accessories; and
WHEREAS, VLC desires to engage Manufacturer as the sole and exclusive
manufacturer for PVA Terminals (as defined below) and accessories and
Manufacturer desires to manufacture in PVA Terminals; and
WHEREAS, VLC is in the process of obtaining certain world-wide
distribution and patent rights (excluding ten states in the United States) with
respect to the PVA Terminals:
NOW, THEREFORE, for good and valuable consideration the receipt of
which is acknowledged, the parties hereto agree as follows:
Section 1. Term. Provided neither party is in default hereunder or has
exercised its rights hereunder to terminate this Agreement, Manufacturer shall
manufacture for VLC the PVA Terminals and accessories described in Section 2 for
a term of ten (10) years commencing on April 24, 1997 and ending on April 23,
2007.
<PAGE>
Section 2. Purchase Price. The purchase price for each PVA terminal
Model 734 ("PVA Terminal") shall be as follows:
(a) The unit price for the basic PVA Terminal with communications, but
with out bill acceptor or touch screen (bill acceptor and touch screen,
together, the "Accessory Products"), shall be Two Thousand Seven Hundred Dollars
($2,700).
(b) The additional unit price for each PVA Terminal equipped with a
bill acceptor shall be Three Hundred Eighty Five Dollars ($385).
(c) The additional unit price for each PVA Terminal equipped with a
touch screen shall be Five Hundred Dollars ($500).
(d) All prices are FOB Manufacturer's factory.
(e) Manufacturer will sell PVA Terminals to VLC at the above prices for
a period of one (1) year and each year thereafter the price of the PVA Terminals
and Accessory Products will be adjusted in March of each year to be equal to the
product obtained by multiplying the prices listed in paragraphs a, b and c of
this Section 2 for the immediately preceding 12-month period by a fraction, the
numerator of which shall be the CIP-U, as defined below, for the month of March
of the immediately prior 12-month period, and the denominator of which shall be
the CIP-U for the month of March of the second most prior year.
<PAGE>
"CIP-U" shall mean the "Consumer Price Index-Seasonally Adjusted U.S.
City Average For All Items For All Urban Consumers, (1982-84=100)" published
monthly in the "Monthly Labor Review" of the Bureau of Labor Statistics of the
United States Department of Labor. If the CIP-U is discontinued, the parties
shall agree to another similar index.
Section 3. Payment Terms. Payment terms for each PVA Terminal and
Accessory Product shall be as follows:
(a) One half (1/2) of the total purchase price at the time an order (a
"Purchase Order") for a PVA Terminal and Accessory Products, if applicable,
shall be in cash or cash equivalents and the remaining one half (1/2) of the
purchase price shall be in the form of a letter of credit (the "Letter of
Credit"). The Letter of Credit shall contain no restrictions on draw-downs by
the Manufacturer except for the requirement of the presentation by Manufacturer
of a bill of lading representing the shipment of PVA Terminals to be paid for by
such draw-down. If such Purchase Order is beyond the manufacturing capability of
Manufacturer, the portion of this deposit related to the PVA Terminals and/or
Accessory Products in excess of such manufacturing capabilities shall be first
applied as payment for circuit boards ordered by VLC pursuant to Section 6(b)
hereof, and the balance shall immediately be returned to VLC.
(b) The balance of the purchase price for the PVA Terminals and/or
Accessory Products to be manufactured by Manufacturer shall be payable at the
option of VLC either (i) prior to the shipment of VLC of the PVA Terminals
and/or Accessory Products or (ii) by the Manufacturer's draw down on the Letter
of Credit thirty (30) days after the date the PVA Terminals and/or Accessory
Products are shipped from the Manufacturer's facilities.
<PAGE>
Section 4. Convenants. (a) Manufacturer agrees that it shall
manufacture the PVA Terminals using manufacturing techniques, raw materials,
supplies and components (including but not limited to the Accessory Products)
that are of equal or better quality as used by Manufacturer in the past when
manufacturing the PVA Terminals and Accessory Products,
(b) (i) Manufacturer shall include in each PVA Terminal and Accessory
Product the most recent version of "PVA Elimination Draw Poker" software
approved by VLC and available at the time of shipment to VLC (unless otherwise
specified by VLC) known as "PVA terminal software", including all upgrades and
modifications thereto (the "Software"), owned, created, licensed or otherwise
under the control of Manufacturer or any of its affiliates; and
(ii) Manufacturer shall make accessible to, and shall take all
reasonable steps to ensure compatibility among, the PVA Terminals, the Accessory
Products and the central system software related to the centralized use of the
PVA Terminals (the "Central System Software").
(c) VLC acknowledges that Manufacturer is the developer and owner of
the Software and Central System Software and that VLC has no ownership interest
or claim to the Software and the Central System Software, other than rights
specifically granted in writing to VLC by Manufacturer.
(d) Manufacturer agrees that it shall not manufacture or sell the PVA
Terminals and/or Circuit Boards for or to any person or entity other than VLC,
except that Manufacturer may manufacture or sell the PVA Terminals or Circuit
Boards for or to (1) any successor or assign of VLC and (2) to any person or
entity that obtains the right to distribute PVA Terminals on or after April 15,
1997.
<PAGE>
(e) VLC hereby permits Manufacturer the right to use VLC's rights in
and to the patents related to "PVA Elimination Draw Poker" (the "Patents") in
connection with the manufacturing of the PVA Terminals pursuant to this
Agreement. Manufacturer agrees that it shall maintain and protect the secrecy of
the Patents.
(f) VLC agrees to place Purchase Orders for a minimum of three hundred
thirty-three (333) PVA Terminals per year during the first three (3) years
following the date of this Agreement.
Section 5. Delivery.
(a) Delivery will begin six (6) weeks from receipt of Purchase Order
and payment.
(b) Shipments will be weekly based on a six (6) month production cycle.
(c) Within five (5) business days of the placement of each Purchase
Order by VLC, Manufacturer shall deliver to VLC a shipment schedule for such
Purchase Order.
(d) Shipment of PVA terminals will be made within forty-eight (48)
hours of in-house final inspection.
(e) Manufacturer shall not be liable for any failure to deliver if such
failure is due to fire, embargo, strike, failure to secure materials from usual
source of supply (or alternate source with similar terms), restrictive
governmental laws or regulations, or
<PAGE>
any circumstance beyond Manufacturer's control which shall prevent Manufacturer
from making, deliveries in the normal course of business. Manufacturer shall
not, however, be relieved from making delivery, nor VLC from acceping delivery
at the agreed price, when the cause interfering with deliveries has been
removed.
Section 6. Production Capability. (a) In the event of any Purchase
Orders by VLC beyond the production capability of Manufacturer, Manufacturer
shall within three (3) business days of receipt of any such Purchase Order,
notify an officer of VLC both verbally and by facsimile of the fact that such
Purchase Order is beyond the production capability of Manufacturer.
(b) In the event that Manufacturer provides notice to VLC of
Manufacturer's insufficient production capabilities pursuant to paragraph (a) of
this Section 6, (1) Manufacturer shall manufacture, at the request of VLC
pursuant to the procedure set forth in Section 3 and Section 5 hereof, the PVA
Terminal's Processor, I.O., and RS 422 Interface printed circuit boards
containing the Software (the "Circuit Boards") for the price of One Thousand
Dollars ($1,000) per Circuit Board. Payment and delivery shall be on the same
terms and conditions as set forth in Section 3 and Section 5 hereof and (2) VLC
shall have the right to engage any other Manufacturer or manufacturers (any such
other manufacturers hereinafter referred to as the "Other Manufacturer") to
manufacture the PVA Terminals and/or Accessory Products. Manufacturer shall
provide to any Other Manufacturer all of the plans and specifications and other
information related to the PVA Terminals and/or Accessory Products with the
exception of the Circuit Boards, the Software and the Central Software) that any
Other Manufacturer finds reasonably necessary or desirable as used in the normal
course of business by Manufacturer to manufacture the PVA Terminals and
Accessory Products, provided
<PAGE>
that such Other Manufacturer agrees in writing to be bound by the terms and
provisions of a confidentiality agreement with Manufacturer containing
substantially the same terms and conditions as the agreement attached hereto as
Exhibit A, with the appropriate changes to reflect that a manufacturer is the
other party and that Manufacturer's plans, specifications and software will be
conditionally provided to such Other Manufacturer for the sole
purpose of the manufacture of PVA Terminals for VLC.
Section 7. Warranty. Manufacturer shall repair or replace (at
Manufacturer's option) any PVA Terminals and/or Accessory Products, or parts
thereof, which in Manufacturer's opinion prove to be defective in workmanship or
material for a period of one (1) year from the date of shipment. The foregoing
is in lieu of all warranties, express or implied, and all obligations or
liabilities on the part of Manufacturer, on account of products listed herein
and sold to VLC. In no event shall Manufacturer be liable for consequential or
special damages. Nor, except as may otherwise be specifically agreed upon in
writing through an authorized representative, shall Manufacturer be liable for
transportation, labor, or other charges or adjustments, repairs, replacement of
parts, installation, or other work that may be done on the PVA Terminals and/or
Accessory Products by VLC. This warranty does not apply to any product that has
been damaged by accident or has been misused, altered, abused, or repaired by
anyone other than Manufacturer or its authorized representative.
Section 8. Compliance with Laws. VLC shall observe, comply with and
execute at VLC's expense all laws, court orders and valid and lawful rules,
requirements and regulations of the United States, State, County, City or
Municipality directly related to the use of the PVA Terminals in which the PVA
Terminals are purchased, situated or sold by VLC.
<PAGE>
Section 9. Indemnification. (a) VLC shall indemnify and save harmless
Manufacturer, and Manufacturer's successors and assigns, from all claims and
demands of every kind that may be brought against Manufacturer, for or on
account of any damage, loss due to injury to persons or property (with the
exception of loss due to injury to persons or property resulting from negligent
workmanship or repair undertaken by Manufacturer or any of its authorized
representatives), resulting from the sale of PVA Terminals under this Agreement
and/or the subsequent use, infringement with respect to the patents used in
connection with the PVA Terminals, repair, alteration or guarantee of such
machines by VLC, in each case not otherwise covered by the warranty provided in
Section 7 hereof.
(b) Manufacturer shall indemnify and save harmless VLC, and VLC's
successors or assigns, from all claims and demands of every kind that may be
brought against VLC or any one of them, for or on account of any damage, loss
due to injury to persons or property resulting from the negligent workmanship or
repair by Manufacturer, or its authorized representative, of the PVA Terminals
and/or Accessory Products.
Section 10. Defaults. Each of the following shall constitute an event of
default:
(a) If Manufacturer or VLC becomes bankrupt or insolvent, the other
party may upon thirty (30) days prior written notice to the bankrupt or
insolvent party, terminate this Agreement without prejudice to (1) in the case
of Manufacturer, the collection of monies then due and owing to the Manufacturer
or (2) in the case of VLC, the delivery of (i) PVA Terminals and/or Accessory
Products for which one-half (1/2) of the purchase price has been paid, provided
VLC shall pay the balance due on such PVA Terminals and/or Accessory Products,
or (ii) the return of such monies or the delivery, at the sole cost and expense
of VLC, of the raw materials and supplies purchased with such deposit, less any
reasonable expenses incurred by Manufacturer in connection with the purchase of
such raw materials and supplies; or
(b) If Manufacturer fails to deliver the PVA Terminals, Accessory
Products and/or Circuit Boards for four (4) consecutive weeks in accordance with
the schedule agreed to pursuant to Section 5 hereof, then VLC may, at its
option, (1) convert the Purchase Order to a Purchase Order for Circuit Boards
and/or (2) accept shipment of the PVA Terminals in their as is condition, and,
in each case, the parties hereto shall negotiate in good faith the appropriate
adjustments to the purchase price.
(c) If VLC fails to place Purchase Orders pursuant to section 11 (f)
and 3(a).
Nothing in this Agreement is intended to limit the remedies that either
party hereto may have at equity or at law and each party hereto shall have the
right to pursue any and all of such remedies.
Section 11. No Relationship. Nothing herein shall be deemed or
construed by the parties hereto, nor any third party, as creating the
relationship of principal and agent, partnership or joint venturer between the
parties. It is understood and agreed that neither the provisions contained
herein, nor any acts of the parties, shall be deemed to create any relationship
between the parties other than manufacturer and customer.
Section 12. Assignment. Neither party may assign this Agreement without
the prior written consent of the other party, which consent shall not be
unreasonably withheld or delayed.
<PAGE>
Section 13. Binding Effect. This Agreement shall bind the parties hereto
and their permitted successors and assigns.
Section 14. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Maryland.
Section 15. Waiver. It is understood and agreed that nothing herein shall
be construed to be a waiver of any of the terms and conditions herein contained,
unless the same be in writing, signed by the party to be charged with such
waiver, and no waiver of the breach of any term shall be construed as the waiver
of the term or any subsequent breach thereof.
Section 16. Miscellaneous. (a) This Agreement sets forth the entire
understanding of the parties with regard to the manufacture of the PVA
Terminals, and it may not be changed, except by a written document signed by all
parties.
(b) The captions and headings are inserted only as a matter of convenience,
and in no way define, limit or describe the scope of this Agreement, or the
intent of any provision thereof.
(c) Whenever used herein, the singular number shall include the plural, the
plural number shall include the singular, and the use of any gender shall
include both genders.
10
<PAGE>
(d) This Agreement shall become effective on the date first set forth above
upon the full and complete execution and delivery by each of the parties hereto.
(e) Nothing in this Agreement is intended to limit any rights Manufacturer
may have to appeal the decision of the United States Bankruptcy Court for the
District of Delaware with respect to Manufacturer's Objection to Motion for
Approval of Settlement Agreement Among Professional Video Associates, Inc.,
Michael J. Horan, VLC, Inc. and William Danton, Bankruptcy No. 95-016 PJW.
(f) All notices shall be delivered by United States certified mail, return
receipt requested, or by a nationally recognized overnight courier service, to
the address set forth above for each party.
(g) This Agreement may be signed in two or more counterparts, when taken
together, shall constitute one and the same agreement.
(h) Each provision of this Agreement shall be considered separable and if
for any reason any provision or provisions herein are determined to be invalid,
unenforceable or illegal under any existing or future law, such invalidity,
unenforceability or illegality shall not impair the operation of or affect those
portions of this Agreement which are valid, enforceable and legal.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
the day and year first-above written.
WITNESS: VLC, INC.
/s/ xxxxxxxxxxxxxx By: /s/ William M. Danton
- - - ------------------ ---------------------
William M. Danton
President
11
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AMUSEMENT WORLD, INC.
/s/ xxxxxxxxxxxxxx By: /s/ Stephen D. Holniker
- - - ------------------ -----------------------
Stephen D. Holniker
President
12
<PAGE>
FEC Roland M. Thomas - COO
FORTUNE ENTERTAINMENT CORPORATION 2700 East Sunset Road, Suite #39
Las Vegas, Nevada NV 89120 USA
Tel: (702) 895 7612 Fax: (702) 435-6129
- - - --------------------------------------------------------------------------------
Urgent - Confidential Fax
- - - -------------------------
To: Steve Holniker From: Roland M. Thomas - COO
Amusement World, Inc. Fortune Entertainment Corporation
Fax: (410) 747 5343 Page 1
- - - --------------------------------------------------------------------------------
Phone: (410) 744 3700 Date: Thursday, September 10, 1998
- - - --------------------------------------------------------------------------------
Re: Amendment to Manufacturing CC: David Jackson - CEO - Fortune
Agreement
- - - --------------------------------------------------------------------------------
Dear Steve,
Further to our discussions, please find below sample amendment to the
Manufacturing agreement between VLC, Inc. and Amusement World, and the Consent
to Assignment of the Manufacturing Agreement to Fortune Entertainment dated 14th
of July 1998.
Also let me take this opportunity to reinforce the support of Fortune
Entertainment of the Assigned Manufacturing Agreement, and Fortune
Entertainment's desire to maintain and strengthen the business cooperation with
yourself and Amusement World. As demonstrated by the recent initial
pre-manufacturing actions with the two companies. We look forward to a long term
mutually profitable relationship.
----------------------------------------------
Amendment to Manufacturing agreement between VLC, Inc. and Amusement World,
Inc., and the Consent to Assignment of the Manufacturing Agreement to Fortune
Entertainment dated 14th of July 1998.
Section 4. Covenants - (f) VLC agrees to place Purchase Orders for a minimum of
three hundred thirty-three (333) PVA terminals per year for three years. The
first year commencing April 24th 1998.
Amendment accepted on behalf of:
Fortune Entertainment Corporation Amusement World, Inc.
/s/ Roland M. Thomas /s/ Stephen Holniker
- - - --------------------------------- ---------------------------------
Roland M. Thomas Stephen Holniker
<PAGE>
FEC Bill Danton -- CEO & President
- - - --------------------------------- Roland Thomas, COO
FORTUNE ENTERTAINMENT CORPORATION 144 xxx Street, Second Floor Suite XXX,
xxxxxxxxx Maine, USA
xxx (xxx) xxx xxxx Fax (xxx) xxx xxxx
- - - --------------------------------------------------------------------------------
Attn: Steve Holniker Thursday, March 04, 1999
Amusement World
5821 Baltimore National Turnpike
Baltimore, MD 21228 Fax (410) 747-5343
Dear Steve,
Further to our conversation, thank you for accepting the suggested variation to
the "Manufacturing Agreement" dated April 24th 1997, between Amusement World,
Inc., and VLC, Inc., the covenants of which are now the responsibility of
Fortune Entertainment Corporation in replacement of VLC, Inc. Please find below
a suitable amendment to the agreement. If you would please indicate your
acceptance by signing below and fax return as soon as possible.
SECTION 4. Covenants.
(f) VLC agrees to place Purchase Orders for a minimum of three hundred thirty
three (333) PVA Terminals per year during three (3) years commencing January
First, Nineteen Hundred and Ninety Nine (01/01/99)
On behalf of Fortune Entertainment Corporation
/s/ Roland M. Thomas
- - - -------------------------------------------
Roland M. Thomas -- Chief Operating Officer
Accepted on behalf of Amusement World, Inc.
/s/ Stephen Holniker
- - - -------------------------------------------
Stephen Holniker -- President
<PAGE>
PLAN OF SHARE EXCHANGE
ACQUIRING
CORPORATION: FORTUNE ENTERTAINMENT CORPORATION
(A Delaware Corporation)
SUBJECT
CORPORATION: FORTUNE ENTERTAINMENT CORPORATION
(A Bahama Corporation)
The Effective Date of the Share Exchange will be October 14, 1997.
The Plan of Share Exchange is as follows:
The Acquiring Corporation will issue one share of its common stock, one
share of Series A Preferred Stock, one share of Series B Preferred Stock and one
share of Series C Preferred Stock in exchange for each 2.5 issued and
outstanding shares of the Subject Corporation.
AGREED TO AND ACCEPTED this 14th day of October, 1997.
FORTUNE ENTERTAINMENT CORPORATION
(A Delaware Corporation)
By /s/ David Jackson
------------------------------
President
FORTUNE ENTERTAINMENT CORPORATION
(A Bahama Corporation)
By /s/ XXXXXXXXXXXXX
------------------------------
President
<PAGE>
LICENSE AGREEMENT
THIS LICENSE AGREEMENT, made by and between FORTUNE ENTERTAINMENT CORPORATION,
a Delaware corporation, wish its principle place of business located at 2700
East Sunset Road, Suite #39, Las Vegas, Nevada, 89120 (hereinafter "Licensor")
and SODAK GAMING CORPORATION, with its principle place of business located at
5301 South Highway 16, Rapid City, South Dakota 67701, (hereinafter "Licensee").
RECITALS
A. Licensor is the owner of a game entitled "Rainbow 21" (hereinafter "Game").
Licensor has developed, adopted, utilized and is the proprietor of the
trademark and/or service mark "Rainbow 21" and trademark registration and
applications thereof (the licensed trademark hereinafter referred to as the
"Licensed Trademark").
B. Licensor is also the Exclusive License Assignee/Proprietor of patents for
said Game ("Patents") which were filed in the United States Patent and
Trademark office and which were Issued on February 21, 1995 and February
27, 1996, respectively as instrument(s) 5,390,934 and 5,494,296.
C. Licensee desires to utilize and display the Licensed Trademark, the Game
and the method of play and apparatus which are embodied In the Patent in
advertisements.
NOW THEREFORE, in consideration of the forgoing recitals and the mutual
covenants and conditions set forth below, the parties agree as follows:
1. DEFINITION OF THE GAME. The Game referred to herein consists of:
(a) The method of play and format of the Game, including the table layouts
and materials relative thereto.
(b) The rules and instructions of play based upon the Patents and,
(c) All advertising and promotional material which have been or will be
developed for the Game shall be provided by Licensor to Licensee, at
no cost, and shall include but not be limited to... Descriptive Game
Brochures, Table Tents, Banners, Stanchion Posters and Video Taped
Training Materials in amounts that are deemed sufficient and
reasonable to service each Licensee client account.
2. LICENSING APPROVAL. Licensor warrants that it has complied with all
applicable regulations and requirements necessary to the lawful pursuit of
its enterprise.
3. GRANT AND ACCEPTANCE OF LICENSE. Licensor hereby grants Licensee for the
term of this Agreement, subject to the terms and conditions hereinafter set
forth, a non-exclusive, nontransferable, and limited right and license to
utilize and display, within those facilities known as INDIAN OWNED CASINO
jurisdictions where Licensee has been lawfully permitted to do so as
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<PAGE>
defined by all applicable local, state and federal laws, the Game, products
incorporating, displaying, or using the Licensed Trademark, and/or other written
material constituting the Patents, solely within the confines of Licensee's
"principle place of business", as defined above, the Game, products
incorporating, displaying, or using the Licensed Trademark, and/or other written
material constituting the Patents. Said grant is strictly limited to the uses
described herein. Except as specifically provided herein, Licensor retains all
rights to license, reproduce, distribute, perform, or display the Game, the
Licensed Trademark and the Patents, as well as all other rights, privileges, and
remedies granted or reserved to a patent owner/assignee and/or trademark laws of
the United States of America. Licensee hereby accepts the conditions and
provisions of said grant of the subject license.
4. LICENSE TERM. The term of this Agreement shall commence upon the date which
it is executed and continue for one (365 days) year,
5. PROPERTY RIGHTS.
(a) OWNERSHIP. Title to the Game Patents is reserved to Licensor. Licensee
acknowledges and agrees that Licensor is and shall remain the owner of
the Game and the Patents relative to same. Licensee further
acknowledges and agrees that, as between the parties, the Licensed
Trademark belongs exclusively to Licensor and shall remain the sole
and exclusive property of Licensor, as well as any goodwill associated
with said Licensed Trademark.
(b) SUBSTANTIAL PUBLIC NOTICE. All written or graphic material designed by
or for Licensee to market, advertise, publicize or otherwise encourage
play associated with the Game, the License Trademark, and/or Patent,
whether utilized, distributed, and/or displayed by Licensee, including
documents, press releases, or interviews relating to advertising and
publicity, shall be marked by Licensee with an appropriate Patent
and/or trademark notice. Such notice shall be of proper form and
content and be properly displayed in a manner that complies with
applicable provisions of the United States Patent and Trademark Laws,
including but not limited to the following:
(i) a Trademark: (mark TM or R), with a legend stating "Rainbow 21"
is a registered trademark of Team Rainbow Inc.
(ii) U.S. Patent No.'s 5,390,934 & 5,494,296
(c) Licensee further acknowledges that the Game, the Licensed Trademark
and the Patents are proprietary in nature. Licensee agrees that during
the term of this Agreement and thereafter not to perform any act which
interferes with Licensor's proprietary rights with respect to any of
the foregoing, except that Licensee may engage in any actions with
respect to disclosure of elements of the Game, the License Trademark
and the Patents that are specifically provided for in this Agreement
and/or are reasonably necessary to the performance of the Licensee's
rights pursuant to this Agreement. Licensee agrees that the
performance of any act which interferes with Licensor's proprietary
rights with respect to any of the foregoing shall constitute a
material breach of this Agreement and shall terminate the license
granted under this Agreement.
(d) Licensee agrees not to remove, deface, destroy, or modify any patent
notice, trademark, service mark, other proprietary markings, or
confidential legends placed on or within the Game or any materials
relating thereto.
2
<PAGE>
6. PROMOTIONAL MATERIAL. Any material created, made, and/or produced by
Licensee for, but not limited to, the promotion and/or advertising of said
Game, i.e. literature, videotape, etc. shall be made available for review
by Licensee to Licensor and shall not be utilized and/or distributed by
Licensee without Licensor's prior written consent. Licensor's consent shall
be deemed given for any material by it in the event no disapproval is
received by Licensee within seven (7) business days of Licensor's receipt
of any such material.
7. USE OF LICENSEE'S NAME. As long as this Agreement remains in effect,
Licensor shall have the right to advise prospective purchasers and lessees
of the Game of Licensee's use of the Game. Licensor shall not, however, use
the name or logo of Licensee or any affiliate of Licensee's prior written
consent of the form and substance of such use.
8. PAYMENT. Licensee shall distribute, rent and/or lease the "Rainbow 21"
Game, on a best efforts basis, to Indian owned casinos for no less than
FIVE-HUNDRED US DOLLARS, per unit per month pursuant the terms and
conditions of this Agreement, unless otherwise agreed, which agreement
shall be indicated by Licensors execution of a Sublicense Agreement. Each
Rental Agreement put under contract by Sodak shall be a roll-over thirty
(30) day Rental Agreement and each client casino under said Agreement shall
remain Sodak's exclusive client throughout the term of this Agreement. In
the event that this Agreement shall terminate for any reason, whatsoever,
the terms and conditions of this Agreement in reference to item "8.a thru
e" shall survive and continue to the benefit of Sodak and Team Rainbow,
Inc. in reference to any and all contracts developed by Sodak with its
client customers.
(a) Licensee shall enjoy a thirty (30%) percent discount on sales of all
leases from one (1) through seventy five (75).
(b) Licensee shall enjoy a thirty (35%) percent discount on all such
leases In excess of those referenced above.
(c) Licensor is the sole owner of the manufacturing rights for the
"Rainbow 21" Game layouts and shall provide all replacement layouts to
Licensee customers at no cost to Licensee.
(d) Replacement Game layouts required by casino customers during the term
of a lease for the use of the Game shall be provided at the price of
One Hundred and Twenty Dollars ($120.00 USD) each and the Licensor
shall bill each leasee customer directly.
(e) Licensee shall pay and settle its account with the Licensor on a
thirty (30) day revolving basis subject to weekends and holidays. Any
balance owed beyond a ten (10) day grace period shall cause for
termination of the Agreement unless another settlement is mutually
agreed upon by the parties hereto.
(f) Licensor excepts Licensee from obtaining any type of security,
security agreement, or collateral to guarantee Sublicense Agreements.
9. LICENSOR'S REPRESENTATIONS AND WARRANTIES. Licensor represents and warrants
Licensee as follows:
(a) Licensor owns all rights in and to the Game "Rainbow 21";
(b) Licensor has complied with all applicable local, state and federal
laws and regulations relative to the pursuit of its enterprise.
3
<PAGE>
(c) The Game does not infringe upon any patent, trademark or copyright for
or property right in or to, or violate any provision of any agreement,
contract, license, permit, law or regulation regarding any other table
game; and
(d) Licensor has the unrestricted right and authority to enter into and
perform under this Agreement, and Licensor's execution of and
performance under this Agreement does not and will not violate any
provision of any agreement, contract, license, permit, law or other
regulation to which Licensor is a party or is subject or which applies
to the Game.
10. INDEMNIFICATION.
(a) Licensor covenants and agrees to defend, indemnify, and hold harmless
Licensee from and against any and all claims, demands, suits,
judgments, collectively hereinafter referred to as "Claims", arising
out of or resulting from Licensee's exercise of the License granted
hereunder including but not limited to any Claims that the Game and/or
Licensed Trademark infringes a duly issued United State patent,
copyright or trademark. Licensee agrees to keep Licensor fully advised
of such Claims and the progress of any legal action related thereto.
Licensor shall have the right to assume the defense of any Claims at
its own cost and expense.
(b) Licensee shall promptly notify Licensor in writing of any infringement
or suspected infringement of the Patents or the Licensed Trademark by
a third-person. Without prior written consent of Licensor, Licensee
shall have no right to make any demands or claims, bring suit, effect
any settlements, or take any other action, with respect to
infringement or suspected infringement. Licensee shall cooperate fully
with Licensor in any such action Licensee may, at its discretion,
choose to take with respect to said infringement or suspected
infringement.
(c) Licensor makes no claims as to the "Games" legality in Licensee's
jurisdiction. Licensee agrees to abide and comply with all local,
state and federal laws regarding the sale of the "Game".
11. ASSIGNMENT. Licensee shall not assign, or otherwise transfer, its rights
granted under this Agreement. Any attempt to make such an assignment
without Licensor's consent shall be void. This license is fully
transferable by Licensor.
12. TERMINATION.
(a) In the event of any breach or any default of performance by either
party, hereto, this Agreement may be terminated by giving written
notice thereof. The defaulting party shall then have fourteen (14)
days following receipt of such notice to cure the breach or default
and thus reinstate this Agreement.
(b) A breach and/or default shall include, but not be limited to, any of
the following:
(i) Either party's engaging in any conduct, either directly or
indirectly, which is in derogation of any of the other's rights
with regard to the Game, the Licensed Trademark and/or the
Patents;
(ii) Except as otherwise specifically excluded from the notice
provision of this paragraph either party's failure or neglect to
perform or observe any of its existing or future obligations
under this Agreement.
4
<PAGE>
(iii) The filing of a voluntary or involuntary petition in bankruptcy
with respect to either party.
(iv) The execution by either party of any assignment for the benefit
of creditors or a composition with creditors;
(v) The insolvency (as that term is defined under the Federal
Bankruptcy Laws) of either Party;
(vi) The appointment of a receiver, trustee in bankruptcy, or similar
officer to take charge of part or all of either party's
property; or
(vii) Either party's failure to pay any moneys when due and owing to
the other party or either party's failure to furnish the other
with an accurate statement.
(c) Licensee agrees that immediately upon the termination of this
Agreement for any reason whatsoever, Licensee return to Licensor all
materials relative to the Game or destroy all said materials and
certify to Licensor the fact of such destruction. Upon termination of
the License granted hereunder, Licensor's obligations under this
Agreement shall cease, except with respect to any claims arising
during the course of said Agreement.
(d) In the event location breaches the Sublicense Agreement, Licensee
shall assign any and all interest it has in said Sublicense Agreement
to Licensor and Licensor will be held exclusively responsible for
legal costs of securing possession of the games from location and
enforcement of any other legal remedies against a location under the
Sublicense Agreement.
13. GENERAL TERMS AND CONDITIONS.
(a) Unless otherwise provide in this Agreement, any notice or other
communication required or permitted by this Agreement to be given to
either party shall be deemed to have been duly given if in writing and
delivered personally or mailed by registered or certified mail, return
receipt requested (United State Postal Service) to:
For Licensor..., FORTUNE ENTERTAINMENT CORPORATION
303 - 543 Granville Street
Vancouver, British Columbia
Canada V6C IX8
(ii) For Licensee..., SODAK GAMING CORPORATION
5301 South Highway 16
Rapid City, South Dakota 57701
(b) Each party shall be deemed to have received notice or other
communication upon actual receipt or when receipt has been refused.
(c) Licensor and Licensee agree that this Agreement may be modified only
by a written instrument duly executed by persons authorized to
execute agreements on their behalf.
(d) Licensor and Licensee agree that no failure to exercise, and no delay
in exercising any right, power, or privilege hereunder on the part of
either party shall operate as a waiver of any right, power or
privilege. Licensor and Licensee further agree that no single or
partial exercise of any right, power or privilege hereunder shall
preclude its further exercise.
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<PAGE>
(e) If any legal action is necessary to enforce the terms of this
Agreement, the prevailing party shall be entitled to reasonable
attorney's fees in addition to any other relief to which that party
may be entitled.
(f) If any part of this Agreement is adjudged by any court of competent
jurisdiction to be invalid, that judgment shall not affect or nullify
the remainder of this Agreement, and the effect shall be confined to
the part immediately involved in the controversy adjudged.
(g) This Agreement shall be deemed to have been made in, and shall be
construed pursuant to, the internal laws of the State of Nevada,
without any further reference to the conflict of law provisions of the
State of Nevada.
(h) This Agreement sets forth the entire agreement and understanding of
the parties hereby, and supersedes any prior agreements, arrangements,
and understanding between them. No representation, promise, or
inducement has been made by either party that is not embodied in this
Agreement, and neither party shall be bound by or liable for alleged
representation, promise, or inducement not set forth.
IN WITNESS WHEREOF, the parties have executed this Agreement on the _______ day
of ____________, 1999.
FORTUNE ENTERTAINMENT SODAK GAMING
CORPORATION CORPORATION
By: _______________________________ By: ___________________________________
Signature: ________________________ Signature: ____________________________
Title: ____________________________ Title: ________________________________
6
<PAGE>
EXHIBIT B
STOCK OPTION AND PURCHASE AGREEMENT
------------------------
THIS STOCK OPTION AND PURCHASE AGREEMENT (the "Agreement") is made and entered
into this 9th day of April 1998, by and between Andrew Kaneb and Mrs. Marcela G.
Kaneb, spouse of Andrew Kaneb, her liability limited as to conveyance of her
marital interest in the stock, if any, (herein acting collectively and
designated as the "Seller"), and Fortune Entertainment Corporation, a Delaware
corporation, (hereinafter referred to and designated as the "Buyer") herein
represented by Mr. David Jackson, duly authorized for these purposes as he so
declares.
RECITALS
A. "Seller" is the recorded and beneficial owner of the aggregate sum of 125,000
shares (the "Stock") of the common stock ("Common Stock"), of Sega Gaming
Technology Inc., a Nevada corporation (the "Company"), and has all of the rights
necessary and required to sell and transfer the said "Stock";
B. "Buyer" desires to acquire "the Stock" from "Seller" and "Seller" desires to
sell "the Stock" to "Buyer", upon such terms and conditions as are hereinafter
to be more fully enumerated;
Now, therefore, in consideration of the foregoing premises and the
mutual convenants and conditions hereinafter set forth, the parties, hereto do
hereby mutually agree as follows:
<PAGE>
Page 2
1. PURCHASE, OPTION, TRANSFER, CONSIDERATION AND DELIVERY OF STOCK:
a) Purchase of stock. "Buyer" shall purchase 62,500 shares from
"Seller" for $8.00 U.S. Dollars per share for a total purchase price of
$500,000.00 Dollars in the aggregate, payable forthwith upon the execution of
the present Memorandum of "Stock Option and Purchase Agreement";
b) Option of stock. "Buyer" shall have an exclusive option to further
purchase the balance of the "Stock", (62,500 shares) from "Seller", for $8.80
U.S. Dollars per share ($550,000.00 in the aggregate), (THE "OPTION");
The "Option" shall expire on December 31, 1998, at 4:00 p.m. Est. if not
exercised prior thereto;
c) Transfer of stock. Upon the terms and subject to the conditions of
this Agreement, "Seller" hereby agrees to transfer physical possession and
title, and "Buyer" hereby agrees to take physical possession and title to "the
Stock";
i) in the case of the first 62,500 shares, physical possession and
title thereto, are to be transferred upon receipt of payment by
the "Seller";
ii) in the case of the second tranche of 62,500 shares, physical
possession and title are to be transferred upon receipt of
payment by the "Seller", or in the event of partial payment(s),
in accordance with section e) hereinabove;
d) Consideration. In consideration of the option and purchase of the
aforesaid "Stock", "Buyer" shall pay:
<PAGE>
Page 3
i) $550,000.00 U.S. Dollars at the execution of the present
Memorandum of "Stock Option and Purchase Agreement";
e) Payment and Delivery. In the event that "Buyer" makes partial
payments prior to December 31st, 1998, on the balance of the stock, "Seller"
shall be required to deliver physical possession and title to the pro-rata
portion of shares paid for, but never in a block(s) of less than 15% of the
total number of shares (62,500) to be purchased.
f) Conditions to Closing. The obligations of "Buyer" and "Seller"
pursuant to this Agreement are conditional upon (i) the consent of each of the
shareholders of the "Company" to the sale of "the Stock" pursuant to the terms
of this Agreement, as required by those certain Stockholders and Registration
Rights Agreements, dated May 27, 1997 and December 8, 1997, executed between the
"Company" and the persons named therein (the "Stockholders Agreement") and (ii)
"Buyer" executing a counterpart of the Stockholders Agreement or an
acknowledgment of "Buyer's" obligations as a shareholder of the "Company", at
the election of the "Company" and in accordance with the terms of the
Stockholders Agreement (the "Conditions"). "Seller" shall give notice of
satisfaction of the Conditions referred to in (i) above, promptly upon becoming
aware of the same. "Buyer" further agrees to enter into the Stockholders
Agreement in satisfaction of the condition described in (ii) above.
g) Delivery of documents. "Seller" shall cause to be delivered to
"Buyer", prior to the signature of these presents, all of the documents
mentioned in section 1 paragraph (c)(i) of these presents, including the
Stockholders Agreement, and with respect to Section 1 paragraph (c)(ii), all
undertakings expressed or implied on the part of the "Buyer" in the present
agreement, are subject to the "Buyer"'s satisfaction with said documents. The
signature of these presents by the "Buyer" shall confirm his satisfaction that
the aforesaid documents have been delivered.
<PAGE>
Page 4
h) Further Assurances. Subject to the Closing, each party to this Agreement
agrees to execute and deliver, from time to time in the future, such other
documents and instruments as the other party may reasonably request in order to
carry out and effect the sale, transfer and delivery of "the Stock" to "Buyer",
and to vest in "Buyer", a good and marketable title thereto.
2. REPRESENTATIONS AND WARRANTIES OF "SELLER"
As a material inducement to "Buyer" to execute this Agreement, and to
acquire "the Stock", "Seller" represents and warrants to "Buyer" as follows:
a) Equity Interest in the Company. "Seller" is the recorded and beneficial
owner of and aggregate 125,000 shares of Common Stock.
b) Title to the Stock. "Seller" warrants and declares that it has good,
absolute and marketable title to "the Stock", free and clear of all liens,
claims, encumbrances and restrictions of every kind, type, or nature, other than
those arising pursuant to the Stockholders Agreement of Sega Gaming Technology.
"Seller" has not granted any options, warrants or other rights to any person to
acquire any rights or interests in or to any shares of "the Stock", The delivery
of "the Stock" to "Buyer" at the closing, under this Agreement shall vest in
"Buyer" a good, absolute and marketable title to all of "the Stock", free and
clear of any and all liens, claims encumbrances and restrictions of every kind.
c) Authority; Binding Obligation. "Seller" represents and warrants that it
has the full and unrestricted right, power, capacity and authority to enter
into, execute and deliver this Agreement and to transfer and deliver good, valid
and marketable title to all of "the Stock", free and clear of any and all liens,
claims, encumbrances and restrictions of every kind, including any and all
community property interests therein, pursuant only to the consent of the
"Seller's" spouse, the intervening party, Mrs. Marcela G. Kaneb, which said
consent, is part of the present agreement. This Agreement constitutes the legal,
valid and binding obligation of "Seller", enforceable against "Seller". In
accordance with its terms, except that such enforcement may be limited by
bankruptcy, insolvency or other similar laws affecting the enforcement of
creditors' rights generally.
<PAGE>
Page 5
d) Knowledge of "Seller". In entering into this Agreement and performing
its obligations hereunder, "Seller" has relied upon information concerning the
Company from sources other than "Buyer", and not upon any representations of the
"Buyer" with respect thereto.
3. REPRESENTATIONS AND WARRANTIES BY "BUYER"
As a material inducement to "Seller" to execute this Agreement and to
perform "Sellers" obligations hereunder, "Buyer" hereby represents and warrants
to "Seller" as follows:
a) Due Authorization. This Agreement has been duly authorized, executed and
delivered by "Buyer" and constitutes a legal, valid and binding obligation of
"Buyer", enforceable against "Buyer" in accordance with its terms, except that
such enforcement may be limited by bankruptcy, insolvency or other similar laws
affecting the enforcement of creditors' rights generally.
b) Circumstances of Transfer. "Buyer" is acquiring "the Stock" for its own
account, for investment purposes only, and not with a view to or for resale in
connection with the distribution thereof, in a transaction not accompanied by
the publication of any advertisement. Buyer is sophisticated in business matters
of this nature, and experienced in evaluation investments of this type.
<PAGE>
Page 6
c) Knowledge of "Buyer"; Restricted Stock. In entering into this
Agreement and performing its obligations hereunder, "Buyer" has relied upon
information concerning the Company from sources other than the "Seller", and not
upon any representations of the "Seller" with respect thereto. "Buyer" is aware
of the absence of a public market for "the Stock", knows that the transfer of
"the Stock" is restricted by the Securities Act of 1933, as amended, and by the
terms of the Stockholders Agreement, and may be restricted by other applicable
laws and regulations, and "Buyer" agrees to such restrictions and the placement
of a legend or legends reflecting such restrictions an any certificates
representing "the Stock".
4. MISCELLANEOUS
a) Governing Law. This Agreement is made and entered into in the State
of Nevada and the laws of said State shall govern the validity and
interpretation hereof and the performance by the parties hereto of their
respective duties and obligations hereunder.
b) Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
c) Captions and Section Headings. Section titles and captions contained
in this Agreement are inserted as a matter of convenience and for reference
purposes only, and in no way define, limit, extend or describe the scope of this
Agreement or the intent of any provisions hereof.
d) Costs and Attorneys' Fees. If any action, suit or other proceeding
is instituted concerning or arising out of this Agreement, the party in whose
favor judgement is rendered shall recover all of such party's costs and
attorneys' fees
<PAGE>
Page 7
incurred in each and every such action, suit or other proceeding, including any
and all appeals or petitions therefrom.
e) Notices. All notices, requests, demands, deliveries and other
communications hereunder shall be in writing and, except as otherwise
specifically provided in this Agreement, shall be deemed to have been duly given
if delivered by facsimile transmission to the parties at the following addresses
and fax numbers.
If to "Seller";
6311 South Industrial Rd.
Las Vegas, NV 89118
Fax No, 702-896-6095
If to "Buyer":
Hart and Trinen
1624 Washington Street
Denver, CO 80203
Fax No.
Any of the parties hereto may, from time to time, change its address
for receiving notices by giving written notice thereof in the manner outlined
above.
f) Survival of Representations and Warranties. All agreements,
representations and warranties contained herein shall survive the execution and
delivery of this Agreement, any investigation at any time made, the sale and
purchase of "the Stock" and payment therefor, and any disposition of "the
Stock".
<PAGE>
Page 8
g) Entire Agreement. This Agreement contains the entire understanding
of the parties with respect to the subject matter of this Agreement and there
are no further or other representations, warranties, agreements or
understandings, written or oral, in effect between the parties relating to the
subject matter of this Agreement unless expressly referred to herein.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
"SELLER"
/s/ Andrew Kaneb
--------------------
ANDREW KANEB
/s/ Marcela G. Kaneb
--------------------
MARCELA G. KANEB
"BUYER"
FORTUNE ENTERTAINMENT CORPORATION
PER: /s/ David Jackson
----------------------
DAVID JACKSON, CEO
<PAGE>
THIS LEASE is dated the 17th day of December 1996.
BETWEEN:
Harwood Corporation
(the "Landlord")
- and -
Fortune Entertainment Group Corporation
(the "Tenant")
Section 1: Grant and Premises
In consideration of the performance by the Tenant of its obligations under this
Lease, the Landlord leases to the Tenant the mutually agreed upon Rentable Area
(the "Premises") comprising 2,333 square feet, situated on the 3rd floor of the
Bower Building (the "Building") located at 543 Granville Street, Vancouver,
British Columbia on lands and premises which are legally described as: Lot 2,
Block 32, D1.541 (the "Lands") for the Term. Useable are a comprises 1,927
square feet, shown outlined in red on the plan attached as Schedule "A" The
parties hereto mutually agree that the above figures are the correct figures and
will be used in all calculations under this Lease.
Section 2: Term
The term of this Lease (the "Term") is 5 (five) years commencing from the 1st
day of March 1, 1997 (the "Commencement Date") and continuing to the last day of
February 28, 2002.
Section 3: Rent
(a) The Rent for the Premises shall be $11.75 per square foot. The annual Rent
during this time shall be $27,412.75 payable in monthly installments of
$2,284.40. The Tenant shall pay rent (the "Rent") throughout the Term, to the
Landload, at the office of the Landlord or at such other place designated by the
Landlord, in lawful money of Canada, without prior demand and without any
deduction, abatement, setoff or compensation. Rent will be payable to the
Landlord in equal monthly installments, each in advance, on the first day of
each calendar month of the Term commencing on the Commencement Date.
(b) The Tenant shall also pay to the Landlord the Tenant's proportionate share
of Operating Costs (outlined in Schedule "B") and the estimated property taxes
for the Premises in equal monthly installments. This rate is currently estimated
at $10.00 per square foot (Operating Costs and Property Taxes combined). Such
payment shall be included with the Rent payment set out in Section 3(a). In the
event that the actual taxes exceed the estimated amount, the Tenant shall pay
such deficiency on demand. In the event actual taxes are less than the estimated
amount paid by the Tenant, the Landlord shall refund to the Tenant the amount
paid in excess of the actual taxes.
(c) The Tenant shall also pay to the Landlord or to the appropriate taxing
authority if required by the Landlord, all goods and services taxes, sales
taxes, value added taxes, business transfer taxes, or any other taxes imposed on
the Landlord with respect to Rent or in respect of the rental of space under
this Lease, whether characterized as a goods and services tax, sales tax, value
added tax, business transfer tax or otherwise. The Landlord shall have the same
remedies and rights with respect to the payment or recovery of such taxes as it
has for the payment or recovery of Rent under this Lease.
(d) A deposit cheque for $9,049.12 payable to the Royal LePage, has been
received, and one half shall be credited to the Tenant for its payment of the
first Basic Rent due, plus Goods and Services Tax. The balance shall be held as
security and credited towards the last months Basic Rent due in the Term. In the
event of default under the terms hereof, the Landlord may terminate this
agreement and retain the deposit in full satisfaction of any remedies available
to the Landlord. The deposit shall be held, in trust, until the Tenant takes
possession.
<PAGE>
(e) During the first two years of the Term, payment of Rent and Operating Costs
is guaranteed jointly and severally by David B. Jackson and Bryan M. Dear.
Section 4: Option to Renew
Subject to the Landlord requiring the Premises for connection to the Pacific
Centre mall, the Tenant shall have the right to renew the Lease with respect to
the Premises and any additional space leased for an additional Term of 5 (five)
years on the same terms and conditions, save and except for any inducements,
option and the Rent. The Rent during the renewal period shall be at a fair
market rent for the space at the time of renewal. Such rate shall be mutually
agreed upon by the Tenant and Landlord, failing which the rate shall be
determined by an arbitrator mutually agreed to by the Tenant and Landlord. To
exercise the right, the Tenant shall give written notice to the Landlord no
later than 4 (four) months prior to the date of expiry of the Term, otherwise
this Option to Renew shall be deemed waived.
Section 5: Use
The Premises shall be used for the purposes of a business office only. The
Tenant shall conduct its business in the Premises in a reputable and first class
manner.
Section 6: Taxes and Utilities
(a) The Tenant shall pay when due all business taxes attributable to the
personal property, trade fixtures, business, income, occupancy or sales of the
Tenant or any other occupant of the Premises and to any leasehold improvements
installed in the Premises and to the use of the Building by the Tenant.
(b) The Landlord shall replace bulbs, tubes and ballasts in the lighting system
in the Premises.
Section 7: Landlord's Services
(a) The Landlord shall make available to the Premises electricity for normal
lighting and miscellaneous power requirements and, in normal quantities, water
and other public utilities generally made available to other tenants of the
Building by the Landlord. Elevators, Building access and washrooms are available
at all times to Tenant, subject to Section 21(b).
(b) The Landlord may: (i) alter the Building (ii) do such things on, or in the
Lands as are required to comply with any laws, regulations, orders or directives
affecting the Lands; and (iii) do such other things on or in the Lands as the
Landlord, in the use of good business judgment determines to be advisable;
provided that notwithstanding anything contained in this Section, access to the
Premises shall at all times be available. The Landlord shall not be in breach of
its covenant for quiet enjoyment or liable for any loss, costs or damages,
whether direct or indirect, incurred by the Tenant due to any of the foregoing.
(c) The Landlord will provide janitorial and cleaning services consistent with
the standard of first class buildings in the City of Vancouver.
Section 8: Receiving, Shipping, Movement of Articles
(a) The Tenant shall not receive or ship articles of any kind except through
facilities and designated doors and at hours designated by the Landlord and
under the supervision of the Landlord.
(b) Hand trucks, carryalls or similar appliances shall only be used in the
Building with the consent of the Landlord and shall be equipped with rubber
tires, slide guards and other such safeguards as the Landlord requires.
(c) The Tenant, its agents, servants, contractors, invitees or employees, shall
not bring in or take out, position, construct, install or move any safe,
business machinery or other heavy machinery or equipment or anything liable to
injure or destroy any part of the Building without first obtaining the consent
in writing of the Landlord.
Section 9: Access and Entry
(a) The Landlord shall be entitled at all reasonable times, and at any time in
case of emergency to enter the Premises to examine them; to make such repairs,
alterations or improvements in the Premises or to the Building as the Landlord
considers necessary or desirable and for any other purpose necessary to enable
the Landlord to perform its obligations or exercise its rights under this Lease
or in the administration of the Building. The Landlord shall exercise its rights
under this Section, to the extent possible in the circumstances, in such manner
so as to minimize interference with the Tenant's use and enjoyment of the
Premises.
<PAGE>
(b) The Landlord and its agents shall have the right to enter the Premises at
all reasonable times, with prior consent not to be unreasonably withheld, to
show them to prospective purchasers and, during the last four months of the Term
(or the last four months of any renewal term if this Lease is renewed), to
prospective tenants.
(c) No entry into the Premises or anything done hereunder by the Landlord
pursuant to a right granted by this Lease shall constitute a breach of any
covenant for quiet enjoyment, or (except where expressed by the Landlord in
writing) shall constitute a re-entry or forfeiture, or an actual or constructive
eviction.
Section 10: Maintenance
(a) The Landlord may enter the Premises at all reasonable times to view their
condition and the Tenant shall at its sole cost maintain and keep the Premises
in good and substantial repair according to notice in writing. At the expiration
or earlier termination of the Term, the Tenant shall surrender the Premises to
the Landlord in as good condition and repair as the Tenant is required to
maintain the Premises throughout the Term.
(b) If the Tenant fails to carry out any maintenance, repairs or work required
to be carried out by it under this Lease to the reasonable satisfaction of the
Landlord, the Landlord may at its option carry out such maintenance or repairs
without any liability for any resulting damage to the Tenant's property or
business. The cost of such work, plus a sum equal to 15% of such cost
representing the Landlord's overhead, shall be paid by the Tenant to the
Landlord.
Section 11: Landlord's Work
The Landlord shall, at its cost, provide improvements as detailed in Schedle C,
hereof.
Section 12: Parking
The Landlord shall provide to the Tenant 2 reserved parking stalls in the
Building at market rate (currently $150.00 per month plus GST and PST).
Section 13: Time Of The Essence
Time is of the essence in this agreement.
Section 14: Compliance with Laws
The Tenant shall, at its own expense, promptly comply with all laws, by-laws and
government orders and all reasonable requirements or directives of the Landlord
affecting the Premises or their use, repair or alteration.
Section 15: Lease Provisions
All provisions of this Lease shall survive the completion of this transaction.
In the event of any conflict between the provisions of this Lease and the Offer
to Lease, the provisions of this Lease shall prevail.
Section 16: Tenant Improvements
(a) The Tenant acknowledges and agrees that the Landlord will provide a
contribution towards the cost of Improvements. These improvements shall be as
agreed by the Landlord and Tenant within 5 (five) days of submission by the
Tenant to the Landlord of specifications and drawings detailing the Tenant
Improvements. The Landlord shall contribute to a maximum value of $32.00
(thirty-two) per useable square foot. The Tenant Improvement Allowance shall be
payable by the Landlord to the approved contractor on submission of the
contractor's invoices duly certified as correct by the Tenant after the
specified work has been completed. The final 10% payment shall be made after the
time limit for filing a lien has expired and following receipt by the Landlord
of a statutory declaration as the non-existence of any liens. Any and all
contracts for the purpose of Tenant Improvements must be approved by the
Landlord. Tenant Improvements in excess of the $32.00 (thirty-two) per useable
square foot allowance shall be paid in full by the Tenant.
<PAGE>
Section 17: Tenant's Alterations
(a) No repairs or alterations shall be made to the Premises without the
Landlord's written approval, such approval not to be unreasonably withheld. The
Tenant shall submit to the Landlord details of the proposed work including
drawings and specifications prepared by qualified engineers conforming to good
engineering practice. All such alterations shall be performed: (i) at the sole
cost of the Tenant; (ii) by contractors and workmen approved by the Landlord;
(iii) in a good and workmanlike manner; (iv) in accordance with drawings and
specifications approved by the Landlord; (v) in accordance with all applicable
legal and insurance requirements; (vi) subject to the reasonable regulations,
supervision, control and inspection of the Landlord; (vii) subject to such
indemnification against liens and expenses as the Landlord reasonably requires;
and (viii) in accordance with all applicable laws, by-laws and government
orders. The Landlord's reasonable cost incurred with respect to the Tenant's
repairs and alterations including without limitation the cost of approving,
supervising and inspecting all such work shall be paid by the Tenant if any
alterations are completed after the Commencement Date.
(b) The Tenant shall promptly pay for all materials supplied and work done with
respect to repairs and alterations of the Premises so as to ensure that no lien
is registered against any portion of the Lands. If a lien is registered, the
Tenant shall discharge it at its expense forthwith, failing which the Landlord
may at its option discharge the lien by paying the amount claimed to be due into
court or directly to the lien claimant and the amount so paid and all expenses
of the Landlord including reasonable legal fees (on a solicitor and client
basis) shall be paid by the Tenant to the Landlord.
(c) The Tenant shall be entitled to erect signage in the Premises. All signage
must meet City of Vancouver by-laws, and be in keeping with the stature of the
Building. The Landlord shall have the sole determination whether any signage is
in keeping with said stature.
Section 18: Repair Where Tenant at Fault
Notwithstanding any other provision of this Lease, if the Building is damaged or
destroyed or requires repair, replacement or alteration as a result of the act
or omission of the Tenant, its employees, agents, invitees, licensees,
contractors or others for whom it is in law responsible, the cost of the
resulting repairs, replacements or alterations plus a sum equal to 15% of such
cost representing the Landlord's overhead, shall be paid by the Tenant to the
Landlord. Landlord has sole discretion.
Sectin 19: Removal of Tenant Improvements
(a) All Tenant Improvements (other than trade fixtures) shall immediately upon
their replacement, before or during the Term, become the Landlord's property
without compensation to the Tenant. Except as otherwise agreed by the Landlord
in writing, no improvements shall be removed from the Premises by the Tenant
either during or at the expiration or sooner termination of the Term except
that:
(i) the Tenant may, during the Term, in the usual course of its business,
remove its trade fixtures, provided that the Tenant is not in default under this
Lease; and
(ii) the Tenant shall, at the expiration or earlier termination of the
Term, at its sole cost, remove its trade fixtures from the Premises, failing
which, at the option of the Landlord, the trade fixtures shall become the
property of the Landlord and may be removed from the Premises and sole or
disposed of by the Landlord in such manner as it deems advisable.
Section 20: Tenant's Insurance
(a) The Tenant shall, throughout the Term, take out and keep in full force and
effect, insurance for all contents and Tenant Improvements. In addition,
comprehensive general liability insurance which includes the following
coverages; owners protective; personal injury; occurrence property damage; and
employers and blanket contractual liability must be in effect. Such policies
shall: contain inclusive limits of not less than $5,000,000; provide for costs
liability; and name the Landlord as an insured. Such insurance may be in the
form of a binder on the Tenant's existing blanket insurance policy. All policies
shall contain (i) the Landlord's mortgagee(s) (if any) standard mortgage clause,
(ii) a waiver of any subrogation rights which the Tenant's insurers may have
against the Landlord, its mortgagees and against those for whom the Landlord is
in law responsible, and (iii) an undertaking by the insurers to notify the
Landlord and the Landlord's mortgagee(s) (if any) in writing not less than
thirty (30) days prior to any material change, cancellation or termination
thereof.
<PAGE>
(b) The Tenant shall not keep or use in the Premises any article which may be
prohibited by any fire insurance policy in force from time to time covering the
Premises. If: (i) the conduct of business in, or use or manner of use of the
Premises; (ii) or any acts or omissions of the Tenant cause or result in any
increase in premiums for any insurance carried by the Landlord with respect to
the Building, the Tenant shall pay any such increase in premiums.
Section 21: Loss or Damage
(a) The Landlord shall not be liable for any death or injury arising from or
out of any occurrence in, upon, at, or relating to the Lands or damage to
property of the Tenant or of others located on the Premises or elsewhere except
in the case of negligence. The Landlord shall not be liable for any such damage
caused by other tenants or persons on the Lands, or the public. All property of
the Tenant kept or stored on the Premises shall be so kept or stored at the risk
of the Tenant only and the Tenant releases and agrees to indemnify the Landlord
and save it harmless from any claims arising out of any damage to the same
including, without limitation, any subrogation claims by the Tenant's insurers.
(b) The Landlord shall not be responsible for any damages caused to the Tenant
by reason of failure of any equipment or facilities serving the Building except
in the case of negligence. The Landlord shall have the right to stop, interrupt
or reduce any services, systems or utilities provided to, or serving the
Building to perform repairs, alterations or maintenance or to comply with laws
or regulations, or requirements of its insurers, or for causes beyond the
Landlord's reasonable control.
Section 22: Indemnification of the Landlord
Notwithstanding any other provision of this Lease, the Tenant shall indemnify
the Landlord and save it harmless from all loss (including loss of Rent) claims,
actions, damages, liability and expense in connection with loss of life,
personal injury, damage to property or any other loss or injury whatsoever
arising out of this Lease, or any occurrence in, upon or at the Premises, or the
use by the Tenant of the Premises or any part thereof, or occasioned wholly or
in part by any act or omission of the Tenant or by anyone permitted to be on the
Premises by the Tenant. If the Landlord shall, without fault on its part, be
made a party to any litigation commenced by or against the Tenant, then the
Tenant shall protect, indemnify and hold the Landlord harmless in connection
with such litigation. The Landlord may, at its option, participate in or assume
carriage of any litigation or settlement discussions relating to the foregoing,
or any other matter for which the Tenant is required to indemnify the Landlord
under this Lease. Alternatively, the Landlord may require the Tenant to assume
carriage of and responsibility for all or any part of such litigation or
discussions.
Section 23: Destruction of or Damage to Building
(a) Notwithstanding anything contained in this Lease, if:
(i) thirty-five percent (35%) or more of the Building; or
(ii) a portion of the Building or of the Lands or any other improvements
on the Lands which affect access or services essential to the
Premises;
is damaged or destroyed by any cause whatsoever (irrespective of whether the
Premises are damaged or destroyed) and if, in the opinion of the Landlord
reasonably arrived at, the Building or the essential portion described above, as
the case may be, so damaged or destroyed cannot be rebuilt or made fit for the
purposes of the respective tenants of such space within one hundred and eighty
(180) days of the happening of the damage or destruction; then, the Landlord or
Tenant may at its option (to be exercised by written notice to the other party
within sixty (60) days following any such occurrence), elect to terminate this
Lease. In the case of such election, the Term and the tenancy hereby created
shall expire upon the thirtieth (30th) day after such notice is given, without
indemnity or penalty payable by, or any other recourse against the Landlord, and
the Tenant shall, within such thirty (30) day period, vacate the Premises and
surrender them to the Landlord with the Landlord having the right to re-enter
and repossess the Premises discharged of this Lease. Rent shall be due and
payable without reduction or abatement subsequent to the destruction or damage
and until the date of termination.
(b) If the Landlord is entitled to, but does not elect to terminate this Lease
under Section 23(a) the Landlord shall, following such damage or destruction,
diligently repair if necessary that part of the Building damaged or destroyed,
but only to the extent of the Landlord's obligations under the terms of the
various leases for premises in the Building and exclusive of any tenant's
responsibilities with respect to such repair. If the Landlord elects to repair
the Building, the Landlord may do so in accordance with plans and specifications
other than those used in the original construction of the Building.
<PAGE>
Section 24: Assignments, Subleases and Transfers
The Tenant shall not enter into, consent to, or permit any assignment, sublease
or other assignment, sublease or other transfer of this Lease or its rights with
respect to the Premises without prior written consent of the Landlord, which
consent shall not be unreasonably withheld.
Section 25: Assignment By Landlord
The Landlord shall have the unrestricted right to sell, lease, convey or
otherwise dispose of all or any part of the Building or Lands or this Lease or
any interest of the Landlord in this Lease. To the extent that the purchaser or
assignee from the Landlord assumes the obligations of the Landlord under this
Lease, the Landlord shall thereupon and without further agreement be released
from all subsequent liability under this Lease.
Section 26: Defaults
An "Event of Default" shall occur whenever:
(a) any Rent is in arrears and is not paid within 5 (five) days after written
demand by the Landlord;
(b) the Tenant has breached any of its obligations in this Lease (other than
the payment of Rent) and:
(i) fails to remedy such breach within 15 (fifteen) days (or such shorter
period as may be provided in this Lease) of the receipt of written
notification of the alleged breach;
(ii) if such breach cannot be reasonably remedied within 15 days or such
shorter period, the Tenant fails to commence to remedy such breach
within such 15 days or shorter period or thereafter fails to proceed
diligently to remedy such breach; in either case after notice in
writing from the Landlord; or
(c) the Tenant becomes bankrupt or insolvent or takes the benefit of any
statute for bankrupt or insolvent debtors or makes any proposal, assignment or
arrangement with its creditors, or any steps are taken or proceedings commenced
by any person for the dissolution winding-up or other termination of the
Tenant's existence or the liquidation of its assets; or
(d) the Tenant abandons or attempts to abandon the Premises or disposes of its
goods so that there would not after such disposal be sufficient goods of the
Tenant on the Premises subject to distress to satisfy Rent for at least 3
months, or the Premises become vacant and unoccupied for a period of 10 (ten)
consecutive days or more without the consent of the Landlord.
Section 27: Default and Remedies
(a) If and whenever an Event of Default occurs, then without prejudice to any
other rights which it has pursuant to this Lease or at law, the Landlord shall
have the following rights and remedies which are cumulative and not alternative:
(i) on providing the Tenant with notice of the default, and allowing 15
(fifteen) days to remedy said default, to terminate this Lease whether or not
the Landlord has, with respect to the same or another Event of Default,
previously elected or pursued a right or remedy which is inconsistent with
termination of this Lease;
(ii) to enter the Premises as agent of the Tenant and to relet the Premises
for whatever term, and on such terms as the Landlord in its discretion may
determine and to receive the Rent therefor and as agent of the Tenant to take
possession of any property of the Tenant on the Premises, to store such property
at the expense and risk of the Tenant or to sell or otherwise dispose of such
property in such manner as the Landlord may see fit without notice to the
Tenant; to make alterations to the Premises to facilitate their reletting; and
to apply the proceeds of any such sale or reletting first, to the payment of any
expenses incurred by the Landlord with respect to any such reletting or sale;
second, to the payment of any indebtedness of the Tenant to the Landlord other
than Rent; and third, to the payment of Rent in arrears; with the residue to be
held by the Landlord and applied in payment of future Rent as it becomes due and
payable. The Tenant shall remain liable for any deficiency to the Landlord. If
any reletting extends for a period beyond the end of the Term, such reletting
shall not constitute a termination of this Lease, but a reletting as agent of
the Tenant up to the end of the Term and a letting thereafter by the Landlord
for its own account;
<PAGE>
(iii) to recover from the Tenant all damages, and expenses incurred by the
Landlord as a result of any breach by the Tenant including, if the Landlord
terminates this Lease, any deficiency between those amounts which would have
been payable by the Tenant for the portion of the Term following such
termination and the net amounts actually received by the Landlord during such
period of time with respect to the Premises;
(iv) to remedy or attempt to remedy any default of the Tenant under this
Lease for the account of the Tenant and to enter upon the Premises for such
purposes. No notice of the Landlord's intention to perform such covenants need
be given the Tenant unless expressly required by this Lease. The Landlord shall
not be liable to the Tenant for any loss, injury or damage caused by acts of the
Landlord in remedying or attempting to remedy such default and the Tenant shall
pay to the Landlord all expenses incurred by the Landlord in connection with
remedying or attempting to remedy such default; and
(v) to recover from the Tenant the full amount of the current month's Rent
together with the next 3 month's installments of Rent, all of which shall
immediately become due and payable as accelerated rent.
(b) Notwithstanding any provision of this Lease or any provision of applicable
legislation, none of the goods and chattels of the Tenant on the Premises at any
time during the Term shall be exempt from levy by distress for Rent in arrears,
and the Tenant waives any such exemption. If the Landlord makes any claim
against the goods and chattels of the Tenant by way of distress, this provision
may be pleaded as an estoppel against the Tenant in any action brought to test
the right of the Landlord to levy such distress.
Section 28: Damages and Costs
The Tenant shall pay to the Landlord all reasonable damages and costs
(including, without limitation, all legal fees on a solicitor and his client
basis) incurred by the Landlord in enforcing or interpreting the terms of this
Lease, or with respect to any matter or thing which is the obligation of the
Tenant under this Lease, or in respect of which the Tenant has agreed to insure,
or to indemnify the Landlord. Landlord has sole discretion, subject to
arbitration.
Section 29: Survival of Obligations
If the Tenant has failed to fulfill its obligations under this Lease with
respect to the payment of Rent or the removal of improvement and fixtures from
the Premises at the end of the Term, such obligations and the Landlord's rights
in respect thereto shall remain in full force and effect notwithstanding the
expiration, surrender or sooner termination of the Term.
Section 30: Subordination
(a) This Lease and all rights of the Tenant shall be subject and subordinate to
any and all mortgages, charges or like security agreements arranged by the
Landlord of its interest in the Building (the "Mortgages"). On request, the
Tenant shall acknowledge in writing the subordination of this Lease and its
rights under this Lease to any and all such Mortgages and to all advances made
under such Mortgages, provided however, the Landlord has obtained a
non-disturbance agreement in favour of the Tenant. The form of such
subordination shall be mutually agreeable to the Landlord and Tenant.
(b) Within 10 days after written request by the Landlord, the Tenant shall
deliver in a form supplied by the Landlord a statement or estoppel certificate
to the Landlord as to the status of this Lease, including as to whether this
Lease is unmodified and in full force and effect; the amount of Rent then being
paid; and any other matters pertaining to this Lease as to which the Landlord
shall request such statement or certificate, provided that in no event does such
estoppel certificate adversely affect in any way the rights of the Tenant or its
security of tenure.
Section 31: Rules and Regulations
The Tenant shall comply with all Rules and Regulations, and amendments thereto,
adopted by the Landlord from time to time. Such Rules and Regulations may
differentiate between different types of businesses in the Building, and the
Landlord shall have no obligation to enforce any Rule or Regulation or the
provisions of any other lease against any other tenant, and the Landlord shall
have no liability to the Tenant with respect thereto.
<PAGE>
Section 32: Registration
Neither the Tenant nor anyone claiming under the Tenant shall register this
Lease.
Section 33: Notices
Any notice, consent or other instrument which may be or is required to be given
under this Lease shall be in writing and shall be delivered in person or sent by
registered mail postage prepaid, addressed; (a) if to the Landlord; #1700 - 543
Granville Street, Vancouver, B.C. V6C IX8; and (b) if to the Tenant: #303 - 543
Granville Street, Vancouver, B.C. V6C IX8. Any such notice or other instrument
shall be deemed to have been given and received on the day upon which personal
delivery is made or, if mailed, then 48 hours following the date of mailing.
Either party may give notice to the other of any change of address and after the
giving of such notice, the address therein specified is deemed to be the address
of such party for the giving of notices. If postal service is interrupted or
substantially delayed, all notices or other instruments shall be delivered in
person.
Section 34: Entire Agreement
This Lease sets forth the entire agreement between the Landlord and Tenant
concerning the Premises and there are no agreements or understandings between
them other than as are herein set forth. Subject to Section 31, this Lease may
not be modified except by agreement in writing executed by the Landlord and
Tenant.
Section 35: Overholding
If the Tenant remains in possession of the Premises after the end of the Term
with the consent of the Landlord but without having executed and delivered a new
lease or an agreement extending the Term, there shall be no tacit renewal of
this Lease, and the Tenant shall be deemed to be occupying the Premises as a
Tenant from month to month at a monthly Rent payable in advance on the first day
of each month equal to twice the monthly amount of Rent payable during the last
month of the Term, and otherwise upon the same terms as are set forth in this
Lease, so far as these are applicable to a monthly tenancy.
Section 36: Housekeeping
(a) The Tenant shall permit window cleaners to clean the windows of the Premises
during normal business hours.
(b) The Tenant shall not place any debris, garbage, trash or refuse or permit
same to be placed or left in or upon any part of the Lands or Building outside
of the Premises, other than in a location provided by the Landlord specifically
for such purposes, and the Tenant shall not allow any undue accumulation of any
debris, garbage, trash or refuse in or outside of the Premises.
Section 37: Execution
The Tenant confirms and agrees that this Lease has been executed by its
authorized signatories and that if only one signatory has signed this Lease, the
Tenant is authorized by its articles of incorporation or other constating
documents to execute leases by such sole authorized signatory and if this Lease
is not executed under seal by the Tenant, the Tenant is authorized by its
articles of incorporation or other constating documents to execute leases
without a seal. The officers of Harwood Corporation are Rachel Campbell, Daen
Campbell and Jordan Campbell and any or all of them are authorized to execute
this Lease on one another's behalf and have signing authority for Harwood
Corporation.
Section 38: Bicycles
No bicycle or other vehicle shall be brought within the Lands or Building
without consent of the Landlord.
<PAGE>
IN WITNESS WHEREOF the Landlord and Tenant have signed this Lease under seal.
Harwood Corporation
(The Landlord) /s/ XXXXXXXXXXXXXXXXXXXXX
----------------------------------------
Fortune Entertainment Corporation
(The Tenant) Per: /s/ David B. Jackson
----------------------------------------
Authorized Signature
David B. Jackson /s/ David B. Jackson
(Guarantor) ----------------------------------------
David B. Jackson
Bryan M. Dear /s/ Bryan M. Dear
(Guarantor) ----------------------------------------
Bryan M. Dear
<PAGE>
SCHEDULE A
----------
BOWER BUILDING - THIRD FLOOR
[GRAPHIC OMITTED]
BOWER BUILDING - 543 GRANVILLE STREET - 3RD FLOOR
<PAGE>
SCHEDULE B
----------
The Tenant will pay their proportionate share of the Buildings Property Taxes
and Operating Costs as set out below;
RENT, AREA OF FLOOR 2,333 SQ.FT
- - - ------------------- --------------
BUILDING AREA = 57,780.0 SQ.FT = 4.40%
Operating Costs means any amount paid or payable whether by the Landlord or by
others on behalf of the Landlord for maintenance, operation, repair, replacement
to and administration of the Building or allocated by the Landlord to the
Building and for services provided to Tenants, calculated as if the Building
were 100% occupied by Tenants during the Term, including without limitation:
(a) The cost of insurance which the Landlord is obligated or permitted to obtain
under this Lease and any deductible amount applicable to any claim made by the
Landlord under such insurance;
(b) The cost of security, janitorial, landscaping, window cleaning, garbage
removal, snow removal services and regulations;
(c) The cost of heating, ventilation and air-conditioning;
(d) The cost of all fuel, steam, water, electricity, telephone and other
utilities used in the maintenance, operation or administration of the Building,
including charges and imposts related to such utilities to the extent such
costs, charges and imposts are not recovered from other Tenants;
(e) Salaries, wages and other amounts paid or payable for all personnel involved
in the repair, maintenance, operation, security, supervision or cleaning of the
Building, including fringe benefits, unemployment and workmen's compensation
insurance premiums, pension plan contributions and other employment costs and
the cost of engaging contractors for the repair, maintenance, security,
supervision or cleaning of the Building;
(f) Auditing, accounting, legal and other professional and consulting fees and
disbursements incurred in the preparation of certificates of operating and other
costs, together with legal and consulting fees and disbursements;
(g) The costs; (i) of repairing, operating and maintaining the Building and the
equipment serving the Building and of all replacements and modifications to the
Building or such equipment, including those made by the Landlord in order to
comply with laws or regulations affecting the Building; (ii) incurred by the
Landlord in providing and installing energy conservation equipment or systems
and life safety systems; (iii) incurred by the Landlord to make alterations,
replacements or additions intended to reduce operating costs, improve the
operation of the Building or maintain its operation as a first class office
building; and (iv) incurred to replace machinery or equipment which by its
nature requires periodic replacement; all to the extent that such costs are
fully chargeable in the Fiscal Year in which they are incurred in accordance
with sound accounting principles;
(h) The cost of the rental of all equipment, supplies, tools, materials and
signs;
(i) All costs incurred by the Landlord in contesting or appealing Taxes or
related assessments including legal appraisal and other professional fees, and
administration and overhead costs;
(j) Capital Tax;
(k) Depreciation or amortization of the Operating Costs as determined by the
Landlord in accordance with sound accounting principles, if such costs have not
been charged fully in the Fiscal Year in which they are incurred;
(l) A fee for the administration and management of the Building equal to an
amount which the Landlord might reasonably pay to a third party for the
administration and management of the Building.
<PAGE>
SCHEDULE C
----------
LANDLORD'S WORK
---------------
The Landlord shall, at its expense, in conjunction with the Tenant's Leasehold
Improvements, provide the following:
(a) T-Bar ceilings.
(b) Exterior vertical venetian blinds.
(c) Smooth concrete floors ready for floor coverings.
(d) Fluorescent lighting fixtures in accordance with Tenant's layout.
(e) Electrical panel and supply system ready for Tenant's wiring.
(f) Heating, ventilation and air conditioning in accordance with Tenant's
layout.
(g) Automatic sprinkler system in accordance with Tenant's layout.
(h) Tenant's name on directory in Building lobby.
<PAGE>
THIS LEASE is dated the 9th day of April 1997.
BETWEEN:
Harwood Corporation
(the "Landlord")
- and -
Fortune Entertainment Corporation
(the "Tenant")
Section 1: Grant and Premises
In consideration of the performance by the Tenant of its obligations under this
Lease, the Landlord leases to the Tenant the mutually agreed upon Rentable Area
(the "Premises") comprising 1,100 square feet, situated on the 3rd floor of the
Bower Building (the "Building") located at 543 Granville Street, Vancouver,
British Columbia on lands and premises which are legally described as: Lot 2,
Block 32, DL 541 (the "Lands") for the Term. Useable area comprises 909 square
feet, shown outlined in red on the plan attached as Schedule "A" The parties
hereto mutually agree that the above figures are the correct figures and will be
used in all calculations under this Lease.
Section 2: Term
The term of this Lease (the "Term") is 5 (five) years commencing from the 1st
day of May, 1997 (the "Commencement Date") and continuing to the last day of
April, 2002.
Section 3: Rent
(a) The Rent for the Premises shall be $12.25 per square foot. The annual Rent
during this time shall be $13,475.00 payable in monthly installments of
$1,122.92. The Tenant shall pay rent (the "Rent") throughout the Term, to the
Landlord, at the office of the Landlord or at such other place designated by the
Landlord, in lawful money of Canada, without prior demand and without any
deduction, abatement, setoff or compensation. Rent will be payable to the
Landlord in equal monthly installments, each in advance, on the first day of
each calendar month of the Term commencing on the Commencement Date.
(b) The Tenant shall also pay to the Landlord the Tenant's proportionate share
of Operating Costs (outlined in Schedule "B") and the estimated property taxes
for the Premises in equal monthly installments. This rate is currently estimated
at $10.00 per squire foot (Operating Costs and Property Taxes combined). Such
payment shall be included with the Rent payment set out in Section 3(a). In the
event that the actual taxes exceed the estimated amount, the Tenant shall pay
such deficiency on demand. In the event the actual taxes are less than the
estimated amount paid by the Tenant, the Landlord shall refund to the Tenant the
amount paid in excess of the actual taxes.
(c) The Tenant shall also pay to the Landlord or to the appropriate taxing
authority if required by the Landlord, all goods and services taxes, sales
taxes, value added taxes, business transfer taxes, or any other taxes imposed on
the Landlord with respect to Rent or in respect of the rental of space under
this Lease, whether characterized as a goods and services tax, sales tax, value
added tax, business transfer tax or otherwise. The Landlord shall have the same
remedies and rights with respect to the payment or recovery of such taxes as it
has for the payment or recovery of Rent under this Lease.
(d) A deposit cheque for $4,364.70 payable to the Royal LePage Commercial Inc.,
has been received and one half shall be credited to the Tenant for its payment
of the first Gross Rent (Rent plus taxes and operating expenses) due, plus Goods
and Services Tax. The balance shall be held as security and credited towards the
last months Gross Rent due in the Term. In the event of default under the terms
hereof, the Landlord may terminate this agreement and retain the deposit in full
satisfaction of any remedies available to the Landlord. The deposit shall be
held, in trust, until the Tenant takes possession.
<PAGE>
(e) During the first two years of the Term, payment of Rent and Operating Costs
is guaranteed jointly and severally by David B. Jackson and Bryan M. Dear.
Section 4: Option to Renew
The Tenant shall have the right to renew the Lease with respect to the Premises
and any additional space leased for an additional Term of 5 (five) years on the
same terms and conditions, save and except for any inducements, option and the
Rent. The Rent during the renewal period shall be at a fair market rent for the
space at the time of renewal. Such rate shall be mutually agreed upon by the
Tenant and Landlord, failing which the rate shall be determined by an arbitrator
mutually agreed to by the Tenant and Landlord. To exercise the right, the Tenant
shall give written notice to the Landlord no later than 4 (four) months prior to
the date of expiry of the Term, otherwise this Option to Renew shall be deemed
waived.
Section 5: Use
The Premises shall be used for the purposes of a business office only. The
Tenant shall conduct its business in the Premises in a reputable and first class
manner.
Section 6: Taxes and Utilities
(a) The Tenant shall pay when due all business taxes attributable to the
personal property, trade fixtures, business, income, occupancy or sales of the
Tenant or any other occupant of the Premises and to any leasehold improvements
installed in the Premises and to the use of the Building by the Tenant.
(b) The Landlord shall replace bulbs, tubes and ballasts in the lighting system
in the Premises.
Section 7: Landlord's Services
(a) The Landlord shall make available to the Premises electricity for normal
lighting and miscellaneous power requirements and, in normal quantities, water
and other public utilities generally made available to other tenants of the
Building by the Landlord. Elevators, Building access and washrooms are available
at all times to Tenant, subject to Section 21(b).
(b) The Landlord may: (i) alter the Building (ii) do such things on, or in the
Lands as are required to comply with any laws, regulations, orders or directives
affecting the Lands; and (iii) do such other things on or in the Lands as the
Landlord, in the use of good business judgment determines to be advisable;
provided that notwithstanding anything contained in this Section, access to the
Premises shall at all times be available. The Landlord shall not be in breach of
its covenant for quiet enjoyment or liable for any loss, costs or damages,
whether direct or indirect, incurred by the Tenant due to any of the foregoing.
(c) The Landlord will provide janitorial and cleaning services consistent with
the standard of first class buildings in the City of Vancouver.
Section 8: Receiving, Shipping, Movement of Articles
(a) The Tenant shall not receive or ship articles of any kind except through
facilities and designated doors and at hours designated by the Landlord and
under the supervision of the Landlord.
(b) Hand trucks, carryalls or similar appliances shall only be used in the
Building with the consent of the Landlord and shall be equipped with rubber
tires, slide guards and other such safeguards as the Landlord requires.
(c) The Tenant, its agents, servants, contractors, invitees or employees, shall
not bring in or take out, position, construct, install or move any safe,
business machinery or other heavy machinery or equipment or anything liable to
injure or destroy any part of the Building without first obtaining the consent
in writing of the Landlord.
Section 9: Access and Entry
(a) The Landlord shall be entitled at all reasonable times, and at any time in
case of emergency, to enter the Premises to examine them; to make such repairs,
alterations or improvements in the Premises or to the Building as the Landlord
considers necessary or desirable and for any other purpose necessary to enable
the Landlord to perform its obligations or exercise its rights under this Lease
or in the administration of the Building. The Landlord shall exercise its rights
under this Section, to the extent
<PAGE>
possible in the circumstances, in such manner so as to minimize interference
with the Tenant's use and enjoyment of the Premises.
(b) The Landlord and its agents shall have the right to enter the Premises at
all reasonable times, with prior consent not to be unreasonably withheld, to
show them to prospective purchasers and, during the last four months of the Term
(or the last four months of any renewal term if this Lease is renewed), to
prospective tenants.
(c) No entry into the Premises or anything done hereunder by the Landlord
pursuant to a right granted by this Lease shall constitute a breach of any
covenant for quiet enjoyment, or (except where expressed by the Landlord in
writing) shall constitute a re-entry or forfeiture, or an actual or constructive
eviction.
Section 10: Maintenance
(a) The Landlord may enter the Promises at all reasonable times to view their
condition and the Tenant shall at its sole cost maintain and keep the Premises
in good and substantial repair, reasonable wear and tear excepted, according to
notice in writing. At the expiration or earlier termination of the Term, the
Tenant shall surrender the Premises to the Landlord in as good condition and
repair as the Tenant is required to maintain the Premises throughout the Term.
(b) If the Tenant fails to carry out any maintenance, repairs or work required
to be carried out by it under this Lease to the reasonable satisfaction of the
Landlord, the Landlord may at its option carry out such maintenance or repairs
without any liability for any resulting damage to the Tenant's property or
business. The cost of such work, plus a sum equal to 15% of such cost
representing the Landlord's overhead, shall be paid by the Tenant to the
Landlord.
Section 11: Landlord's Work
The Landlord shall, at its cost, provide improvements as detailed in Schedule C,
hereof.
Section 12: Parking
The Landlord shall provide to the Tenant 1 reserved parking stalls in the
Building at market rate (currently $150.00 per month plus GST and PST).
Section 13: Time Of The Essence
Time is of the essence in this agreement.
Section 14: Compliance with Laws
The Tenant shall, at its own expense, promptly comply with all laws, by-laws and
government orders and all reasonable requirements or directives of the Landlord
affecting the Premises or their use, repair or alteration.
Section 15: Lease Provisions
All provisions of this Lease shall survive the completion of this transaction.
In the event of any conflict between the provisions of this Lease and the Offer
to Lease, the provisions of this Lease shall prevail.
Section 16: Tenant Improvements
(a) The Tenant acknowledges and agrees that the Landlord will provide a
contribution towards the cost of Improvements. These improvements shall be as
agreed by the Landlord and Tenant within 5 (five) days of submission by the
Tenant to the Landlord of specifications and drawings detailing the Tenant
Improvements. The Landlord shall contribute to a maximum value of $32.00
(thirty-two) per useable square foot. The Tenant Improvement Allowance shall be
payable by the Landlord to the approved contractor on submission of the
contractor's invoices duly certified as correct by the Tenant after the
specified work has been completed. The final 10% payment shall be made after the
time limit for filing a lien has expired and following receipt by the Landlord
of a statutory declaration as to the non-existence of any liens. Any and all
contracts for the purpose of Tenant Improvements must be approved by the
Landlord. Tenant Improvements in excess of the $32.00 (thirty-two) per useable
square foot allowance shall be paid in full by the Tenant.
<PAGE>
(b) The Tenant shall provide to the Landlord drawings detailing the Tenant
Improvements within ten (10) days of execution of this lease. If the Tenant
fails to provide this information the Landlord may at any time after this period
terminate this Lease.
Section 17: Tenant's Alterations
(a) No repairs or alterations shall be made to the Premises without the
Landlord's written approval, such approval not to be unreasonably withheld. The
Tenant shall submit to the Landlord details of the proposed work including
drawings and specifications prepared by qualified engineers conforming to good
engineering practice. All such alterations shall be performed: (i) at the sole
cost of the Tenant; (ii) by contractors and workmen approved by the Landlord;
(iii) in a good and workmanlike manner; (iv) in accordance with drawings and
specifications approved by the Landlord; (v) in accordance with all applicable
legal and insurance requirements; (vi) subject to the reasonable regulations,
supervision, control and inspection of the Landlord; (vii) subject to such
indemnification against liens and expenses as the Landlord reasonably requires;
and (viii) in accordance with all applicable laws, by-laws and government
orders. The Landlord's reasonable cost incurred with respect to the Tenant's
repairs and alterations including without limitation the cost of approving,
supervising and inspecting all such work shall be paid by the Tenant if any
alterations are completed after the Commencement Date.
(b) The Tenant shall promptly pay for all materials supplied and work done with
respect to repairs and alterations of the Promises so as to ensure that no lien
is registered against any portion of the Lands. If a lien is registered, the
Tenant shall discharge it at its expense forthwith, failing which the Landlord
may at its option discharge the lien by paying the amount claimed to be due into
court or directly to the lien claimant and the amount so paid and all expenses
of the Landlord including reasonable legal fees (on a solicitor and client
basis) shall be paid by the Tenant to the Landlord.
(c) The Tenant shall be entitled to erect signage in the Premises. All signage
must meet City of Vancouver by-laws, and be in keeping with the stature of the
Building. The Landlord shall have the sole determination whether any signage is
in keeping with said stature.
Section 18: Repair Where Tenant at Fault
Notwithstanding any other provision of this Lease, if the Building is damaged or
destroyed or requires repair, replacement or alteration as a result of the act
or omission of the Tenant, its employees, agents, invitees, licensees,
contractors or others for whom it is in law responsible, the cost of the
resulting repairs, replacements or alterations plus a sum equal to 15% of such
cost representing the Landlord's overhead, shall be paid by the Tenant to the
Landlord. Landlord has sole discretion.
Section 19: Removal of Tenant Improvements
(a) All Tenant Improvements (other than trade fixtures) shall immediately upon
their placement, before or during the Term, become the Landlords property
without compensation to the Tenant. Except as otherwise agreed by the Landlord
in writing, no improvements shall be removed from the Premises by the Tenant
either during or at the expiration or sooner termination of the Term except
that:
(i) the Tenant may, during the Term, in the usual course of its
business, remove its trade fixtures, provided that the Tenant is not in default
under this Lease; and
(ii) the Tenant shall, at the expiration or earlier termination of the
Term, at its sole cost, remove its trade fixtures from the Premises, failing
which, at the option of the Landlord, the trade fixtures shall become the
property of the Landlord and may be removed from the Premises and sold or
disposed of by the Landlord in such manner as it deems advisable.
Section 20: Tenant's Insurance
(a) The Tenant shall, throughout the Term, take out and keep in full force and
effect, insurance for all contents and Tenant Improvements. In addition,
comprehensive general liability insurance which includes the following
coverages: owners protective; personal injury; occurrence property damage; and
employers and blanket contractual liability must be in effect. Such policies
shall: contain inclusive limits of not less than $5,000,000; provide for cross
liability; and name the Landlord as an insured. Such insurance may be in the
form of a binder on the Tenant's existing blanket insurance policy. All policies
shall contain (i) the Landlord's mortgagee(s) (if any) standard mortgage clause,
(ii) a waiver of any subrogation rights which the Tenants' insurers may have
against the Landlord, its mortgagees and against those for whom the Landlord is
in law responsible, and (iii) an undertaking by the insurers to notify the
<PAGE>
Landlord and the Landlord's mortgagee(s) (if any) in writing not less than
thirty (30) days prior to any material change, cancellation or termination
thereof.
(b) The Tenant shall not keep or use in the Premises any article which
may be prohibited by any fire insurance policy in force from time to time
covering the Premises. If: (i) the conduct of business in, or use or manner of
use of the Premises; (ii) or any acts or omissions of the Tenant cause or result
in any increase in premiums for any insurance carried by the Landlord with
respect to the Building, the Tenant shall pay any such increase in premiums.
Section 21: Loss or Damage
(a) The Landlord shall not be liable for any death or injury arising from or out
of any occurrence in, upon, at, or relating to the Lands or damage to property
of the Tenant or of others located on the Promises or elsewhere except in the
case of negligence. The Landlord shall not be liable for any such damage caused
by other tenants or persons on the Lands, or the public. All property of the
Tenant kept or stored on the Premises shall be so kept or stored at the risk of
the Tenant only and the Tenant releases and agrees to indemnify the Landlord and
save it harmless from any claims arising out of any damage to the same
including, without limitation, any subrogation claims by the Tenant's insurers.
(b) The Landlord shall not be responsible for any damages caused to the Tenant
by reason of failure of any equipment or facilities serving the Building except
in the case of negligence. The Landlord shall have the right to stop, interrupt
or reduce any services, systems or utilities provided to, or serving the
Building to perform repairs, alterations or maintenance or to comply with laws
or regulations, or requirements of its insurers, or for causes beyond the
Landlord's reasonable control.
Section 22: Indemnification of the Landlord
Notwithstanding any other provision of this Lease, the Tenant shall indemnify
the Landlord and save it harmless from all loss (including loss of Rent) claims,
actions, damages, liability and expense in connection with loss of life,
personal injury, damage to property or any other loss or injury whatsoever
arising out of this Lease, or any occurrence in, upon or at the Premises, or the
use by the Tenant of the Premises or any part thereof, or occasioned wholly or
in part by any act or omission of the Tenant or by anyone pemitted to be on the
Premises by the Tenant. If the Landlord shall, without fault on its part, be
made a party to any litigation commenced by or against the Tenant, then the
Tenant shall protect, indemnify and hold the Landlord harmless in connection
with such litigation. The Landlord may, at its option, participate in or assume
carriage of any litigation or settlement discussions relating to the foregoing,
or any other matter for which the Tenant is required to indemnify the Landlord
under this Lease. Alternatively, the Landlord may require the Tenant to assume
carriage of and responsibility for all or any part of such litigation or
discussions.
Section 23: Destruction of or Damage to Building
(a) Notwithstanding anything contained in this Lease, if:
(i) thirty-five percent (35%) or more of the Building; or
(ii) a portion of the Building or of the Lands or any other
improvements on the Lands which affect access or services
essential to the Premises;
is damaged or destroyed by any cause whatsoever (irrespective of whether the
Premises are damaged or destroyed) and if, in the opinion of the Landlord
reasonably arrived at, the Building or the essential portion described above, as
the case may be, so damaged or destroyed cannot be rebuilt or made fit for the
purposes of the respective tenants of such space within one hundred and eighty
(180) days of the happening of the damage or destruction; then, the Landlord or
Tenant may at its option (to be exercised by written notice to the other party
within sixty (60) days following any such occurrence), elect to terminate this
Lease. In the case of such election, the Term and the tenancy hereby created
shall expire upon the thirtieth (30th) day after such notice is given, without
indemnity or penalty payable by, or any other recourse against the Landlord, and
the Tenant shall, within such thirty (30) day period, vacate the Premises and
surrender them to the Landlord with the Landlord having the right to re-enter
and repossess the Premises discharged of this Lease. Rent shall be due and
payable without reduction or abatement subsequent to the destruction or damage
and until the date of termination.
(b) If the Landlord is entitled to, but does not elect to terminate this Lease
under Section 23 (a) the Landlord shall, following such damage or destruction,
diligently repair if necessary that part of the Building damaged or destroyed,
but only to the extent of the Landlords obligations under the terms of
<PAGE>
the various leases for premises in the Building and exclusive of any tenant's
responsibilities with respect to such repair. If the Landlord elects to repair
the Building, the Landlord may do so in accordance with plans and specifications
other than those used in the original construction of the Building.
Section 24: Assignments, Subleases and Transfers
The Tenant shall not enter into, consent to, or permit any assignment, sublease
or other assignment, sublease or other transfer of this Lease or its rights with
respect to the Premises without prior written consent of the Landlord, which
consent shall not be unreasonably withheld.
Section 25: Assignment By Landlord
The Landlord shall have the unrestricted right to sell, lease, convey or
otherwise dispose of all or any part of the Building or Lands or this Lease or
any interest of the Landlord in this Lease. To the extent that the purchaser or
assignee from the Landlord assumes the obligations of the Landlord under this
Lease, the Landlord shall thereupon and without further agreement be released
from all subsequent liability under this Lease.
Section 26: Defaults
An "Event of Default" shall occur whenever:
(a) any Rent is in arrears and is not paid within 5 (five) days after written
demand by the Landlord;
(b) the Tenant has breached any of its obligations in this Lease (other than the
payment of Rent) and:
(i) fails to remedy such breach within 15 (fifteen) days (or such shorter
period as may be provided in this Lease) of the receipt of written
notification of the alleged breach;
(ii) if such breach cannot be reasonably remedied within 15 days or such
shorter period, the Tenant fails to commence to remedy such breach
within such 15 days or shorter period or thereafter fails to proceed
diligently to remedy such breach; in either case after notice in
writing from the Landlord; or
(c) the Tenant becomes bankrupt or insolvent or takes the benefit of any statute
for bankrupt or insolvent debtors or makes any proposal, assignment or
arrangement with its creditors, or any steps are taken or proceedings commenced
by any person for the dissolution, winding-up or other termination of the
Tenants existence or the liquidation of its assets; or
(d) the Tenant abandons or attempts to abandon the Premises or disposes of its
goods so that there would not after such disposal be sufficient goods of the
Tenant on the Premises subject to distress to satisfy Rent for at least 3
months, or the Premises become vacant and unoccupied for a period of 10 (ten)
consecutive days or more without the consent of the Landlord.
Section 27: Default and Remedies
(a) If and whenever an Event of Default occurs, then without prejudice to any
other rights which it has pursuant to this Lease or at law, the Landlord shall
have the following rights and remedies which are cumulative and not alternative:
(i) on providing the Tenant with notice of the default, and allowing 15
(fifteen) days to remedy said default, to terminate this Lease whether or
not the Landlord has, with respect to the same or another Event of Default,
previously elected or pursued a right or remedy which is inconsistent with
termination of this Lease;
(ii) to enter the Premises as agent of the Tenant and to relet the
Premises for whatever term, and on such terms as the Landlord in its discretion
may determine and to receive the Rent therefor and as agent of the Tenant to
take possession of any property of the Tenant on the Premises, to store such
property at the expense and risk of the Tenant or to sell or otherwise dispose
of such property in such manner as the Landlord may see fit without notice to
the Tenant; to make alterations to the Promises to facilitate their reletting;
and to apply the proceeds of any such sale or reletting first, to the payment of
any expenses incurred by the Landlord with respect to any such reletting or
sale; second, to the payment of any indebtedness of the Tenant to the Landlord
other than Rent, and third, to the payment of Rent in arrears; with the residue
to be held by the Landlord and applied in payment of future Rent as it becomes
due and payable. The Tenant shall remain liable for any deficiency to the
Landlord. If any reletting extends for a period beyond the end of the Term, such
reletting shall not constitute a termination of this
<PAGE>
Lease, but a reletting as agent of the Tenant up to the end of the Term and a
letting thereafter by the Landlord for its own account;
(iii) to recover from the Tenant all damages, and expenses incurred by
the Landlord as a result of any breach by the Tenant including, if the Landlord
terminates this Lease, any deficiency between those amounts which would have
been payable by the Tenant for the portion of the Term following such
termination and the net amounts actually received by the Landlord during such
period of time with respect to the Premises;
(iv) to remedy or attempt to remedy any default of the Tenant under
this Lease for the account of the Tenant and to enter upon the Premises for such
purposes. No notice of the Landlord's intention to perform such covenants need
be given the Tenant unless expressly required by this Lease. The Landlord shall
not be liable to the Tenant for any loss, injury or damage caused by acts of the
Landlord in remedying or attempting to remedy such default and the Tenant shall
pay to the Landlord all expenses incurred by the Landlord in connection with
remedying or attempting to remedy such default; and
(v) to recover from the Tenant the full amount of the current month's
Rent together with the next 3 month's installments of Rent, all of which shall
immediately become due and payable as accelerated rent.
(b) Notwithstanding any provision of this Lease or any provision of applicable
legislation, none of the goods and chattels of the Tenant on the Premises at any
time during the Term shall be exempt from levy by distress for Rent in arrears,
and the Tenant waives any such exemption. If the Landlord makes any claim
against the goods and chattels of the Tenant by way of distress, this provision
may be pleaded as an estoppel against the Tenant in any action brought to test
the right of the Landlord to levy such distress.
Section 28: Damages and Costs
The Tenant shall pay to the Landlord all reasonable damages and costs
(including, without limitation, all legal fees on a solicitor and his client
basis) incurred by the Landlord in enforcing or interpreting the terms of this
Lease, or with respect to any matter or thing which is the obligation of the
Tenant under this Lease, or in respect of which the Tenant has agreed to insure,
or to indemnify the Landlord. Landlord has sole discretion, subject to
arbitration.
Section 29: Survival of Obligations
If the Tenant has failed to fulfill its obligations under this Lease with
respect to the payment of Rent or the removal of improvements and fixtures from
the Premises at the end of the Term, such obligations and the Landlord's rights
in respect thereto shall remain in full force and effect notwithstanding the
expiration, surrender or sooner termination of the Term.
Section 30: Subordination
(a) This Lease and all rights of the Tenant shall be subject and subordinate to
any and all mortgages, charges or like security agreements arranged by the
Landlord of its interest in the Building (the "Mortgages"). On request, the
Tenant shall acknowledge in writing the subordination of this Lease and its
rights under this Lease to any and all such Mortgages and to all advances made
under such Mortgages, provided however, the Landlord has obtained a
non-disturbance agreement in favour of the Tenant. The form of such
subordination shall be mutually agreeable to the Landlord and Tenant.
(b) Within 10 days after written request by the Landlord, the Tenant shall
deliver in a form supplied by the Landlord a statement or estoppel certificate
to the Landlord as to the status of this Lease, including as to whether this
Lease is unmodified and in full force and effect; the amount of Rent then being
paid; and any other matters pertaining to this Lease as to which the Landlord
shall request such statement or certificate, provided that in no event does such
estoppel certificate adversely affect in any way the rights of the Tenant or its
security of tenure.
Section 31: Rules and Regulations
The Tenant shall comply with all Rules and Regulations, and amendments thereto,
adopted by the Landlord from time to time. Such Rules and Regulations may
differentiate between different types of businesses in the Building, and the
Landlord shall have no obligation to enforce any Rule or Regulation
<PAGE>
or the provisions of any other lease against any other tenant, and the Landlord
shall have no liability to the Tenant with respect thereto.
Section 32: Registration
Neither the Tenant nor anyone claiming under the Tenant shall register this
Lease.
Section 33: Notices
Any notice, consent or other instrument which may be or is required to be given
under this Lease shall be in writing and shall be delivered in person or sent by
registered mail postage prepaid, addressed: (a) if to the Landlord: #1700=543
Granville Street, Vancouver, B.C. V6C lX8; and (b) if to the Tenant: #302=543
Granville Street, Vancouver B.C. V6C 1X8. Any such notice or other instrument
shall be deemed to have been given and received on the day upon which personal
delivery is made or, if mailed, then 48 hours following the date of mailing.
Either party may give notice to the other of any change of address and after the
giving of such notice, the address therein specified is deemed to be the
address of such party for the giving of notices. If postal service is
interrupted or substantially delayed, all notices or other instruments shall be
delivered in person.
Section 34: Entire Agreement
This Lease sets forth the entire agreement between the Landlord and Tenant
concerning the Premises and there are no agreements or understandings between
them other than as are herein set forth. Subject to Section 31, this Lease may
not be modified except by agreement in writing executed by the Landlord and
Tenant.
Section 35: Overholding
If the Tenant remains in possession of the Premises after the end of the Term
with the consent of the Landlord but without having executed and delivered a new
lease or an agreement extending the Term, there shall be no tacit renewal of
this Lease, and the Tenant shall be deemed to be occupying the Premises as a
Tenant from month to month at a monthly Rent payable in advance on the first day
of each month equal to twice the monthly amount of Rent payable during the last
month of the Term, and otherwise upon the same terms as are set forth in this
Lease, so far as these are applicable to a monthly tenancy.
Section 36: Housekeeping
(a) The Tenant shall permit window cleaners to clean the windows of the Premises
during normal business hours.
(b) The Tenant shall not place any debris, garbage, trash or refuse or permit
same to be placed or left in or upon any part of the Lands or Building outside
of the Premises, other than in a location provided by the Landlord specifically
for such purposes, and the Tenant shall not allow any undue accumulation of any
debris, garbage, trash or refuse in or outside of the Premises.
Section 37: Execution
The Tenant confirms and agrees that this Lease has been executed by its
authorized signatories and that if only one signatory has signed this Lease, the
Tenant is authorized by its articles of incorporation or other constating
documents to execute leases by such sole authorized signatory and if this Lease
is not executed under seal by the Tenant, the Tenant is authorized by its
articles of incorporation or other constating documents to execute leases
without a seal. The officers of Harwood Corporation are Rachel Campbell, Deon
Campbell and Jordan Campbell and any or all of them are authorized to execute
this Lease on one another's behalf and have signing authority for Harwood
Corporation.
Section 38: Bicycles
No bicycle or other vehicle shall be brought within the Lands or Building
without consent of the Landlord.
<PAGE>
IN WITNESS WHEREOF the Landlord and Tenant have signed this Lease under seal.
Harwood Corporation
(The Landlord) /s/ Jordan Campbell
----------------------------
Fortune Entertainment Corporation
(The Tenant) Per: David Jackson
----------------------------
Authorized Signature
/s/ David B. Jackson
David B. Jackson ----------------------------
(Guarantor) David B. Jackson
/s/ Bryan M. Dear
Bryan M. Dear ----------------------------
(Guarantor) Bryan M. Dear
<PAGE>
SCHEDULE A
BOWER BUILDING 3rd FLOOR
[GRAPHIC OMMITTED]
<PAGE>
SCHEDULE B
The Tenant will pay their proportionate share of the Buildings Property Taxes
and Operating Costs as set out below;
RENT, AREA OF FLOOR 1,100 SQ. FT
- - - ------------------- ------------
BUILDING AREA = 57,780.0 SQ. FT = 1.90%
Operating Costs means any amount paid or payable whether by the Landlord or by
others on behalf of the Landlord for maintenance, operation, repair, replacement
to and administration of the Building or allocated by the Landlord to the
Building and for services provided to Tenants, calculated as if the Building
were 100% occupied by Tenants during the Term, including without limitation:
(a) The cost of insurance which the Landlord is obligated or permitted to obtain
under this Lease and any deductible amount applicable to any claim made by the
Landlord under such insurance;
(b) The cost of security, janitorial, landscaping, window cleaning, garbage
removal, snow removal services and relamping;
(c) The cost of heating, ventilation and air-conditioning;
(d) The cost of all fuel, steam, water, electricity, telephone and other
utilities used in the maintenance, operation or administration of the Building,
including charges and imposts related to such utilities to the extent such
costs, charges and imposts are not recovered from other Tenants;
(e) Salaries, wages and other amounts paid or payable for all personnel involved
in the repair, maintenance, operation, security, supervision or cleaning of the
Building, including fringe benefits, unemployment and workmen's compensation
insurance premiums, pension plan contributions and other employment costs and
the cost of engaging contractors for the repair, maintenance, security,
supervision or cleaning of the Building;
(f) Auditing, accounting, legal and other professional and consulting fees and
disbursements incurred in the preparation of certificates of operating and other
costs, together with legal and consulting fees and disbursements;
(g) The costs: (i) of repairing, operating and maintaining the Building and the
equipment serving the Building and of all replacements and modifications to the
Building or such equipment, including those made by the Landlord in order to
comply with laws or regulations affecting the Building; (ii) incurred by the
Landlord in providing and installing energy conservation equipment or systems
and life safety systems; (iii) incurred by the Landlord to make alterations,
replacements or additions intended to reduce operating costs, improve the
operation of the Building or maintain its operation as a first class office
building, and (iv) incurred to replace machinery or equipment which by its
nature requires periodic replacement; all to the extent that such costs are
fully chargeable in the Fiscal Year in which they are incurred in accordance
with sound accounting principles;
(h) The cost of the rental of all equipment, supplies, tools, materials and
signs;
(i) All costs incurred by the Landlord in contesting or appealing Taxes or
related assessments including legal appraisal and other professional fees, and
administration and overhead costs;
(j) Capital Tax;
(k) Depreciation or amortization of the Operating Costs as determined by the
Landlord in accordance with sound accounting principles, if such costs have not
been charged fully in the Fiscal Year in which they are incurred;
(1) A fee for the administration and management of the Building equal to an
amount which the Landlord might reasonably pay to a third party for the
administration and management of the Building.
<PAGE>
SCHEDULE C
----------
LANDLORD'S WORK
---------------
The Landlord shall, at its expense, in conjunction with the Tenant's Leasehold
Improvements, provide the following:
(a) T-Bar ceilings.
(b) Exterior vertical venetian blinds.
(c) Smooth concrete floors ready for floor coverings.
(d) Fluorescent lighting fixtures in accordance with Tenant's layout.
(e) Electrical panel and supply system ready for Tenant's wiring.
(f) Heating, ventilation and air conditioning in accordance with Tenant's
layout.
(g) Tenant's name on directory in Building lobby.
(h) Building standard glass entry door with sidelights.
(i) Second exit door as required by the City of Vancouver.
(j) Automatic sprinkler system.
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
Sassoon House
Shirley St. & Victoria Avenue
PO Box N-272
Nassau, New Province
The Bahamas
March 1, 1997
Continental Consulting Inc.
Suite 302 - 543 Granville Street
Vancouver, B.C. V6C IX8
Attention: Mr. D. Bruce Horton, President
Dear Mr. Horton:
RE: CONSULTANCY AGREEMENT WITH FEC
- - - ----------------------------------
Further to our various discussions, this letter serves to confirm and
acknowledge the arrangement reached between the two companies.
1. Continental will provide ongoing consulting services to FEC on all matters
relating to management, operation and financing of FEC.
2. The initial goal is to get FEC funded and trading on the OTC NASD market.
3. Continental shall be paid an annual consulting fee of US $125,000, payable
monthly. In addition to the consulting fee, FEC will also be responsible
for any and all reasonable disbursements and out of pocket expenses
incurred by Continental in the course of it providing the necessary
service.
4. Since FEC is currently in a "start up" mode, and is not as yet adequately
funded, we have hereby agreed that the consulting fee due to Continental
may, with mutual prior agreement, be accrued from time to time. Should any
of the consulting fee be accrued, either Continental or D. Bruce Horton
shall have the right to apply any or all of the accrued consulting fees
together with any disbursements towards exercise of any options that may be
set by FEC either in the name or benefit of Continental or D. Bruce Horton.
<PAGE>
5. The commencement date of your services shall be March 1, 1997 and be
automatically renewed on each anniversary for one year unless otherwise
notified in writing.
6. Continental Consulting Inc. shall be solely responsible for all of its own
corporate expenses, including but not limited to office rent, assistant or
substitute and supplies that are used directly in the employee's work, etc.
I trust that the foregoing accurately reflects our discussions and
understanding. If you are in agreement with the above, please sign in the
appropriate space below, confirming the above arrangement. Please return one
copy of this letter, executed by Continental and Mr. Horton and retain the
original for your file and record.
Yours truly,
FORTUNE ENTERTAINMENT CORPORATION
David B. Jackson
Chief Executive Officer & Director
We, the undersigned, hereby acknowledge and confirm the above arrangement with
FEC.
CONTINENTIAL CONSULTING, INC.
March 1, 1997 /s/ D. Bruce Horton
- - - ------------------------- ------------------------------------
Date D. Bruce Horton
(President)
March 1, 1997 /s/ D. Bruce Horton
- - - ------------------------- ------------------------------------
Date D. Bruce Horton
Encl.
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
Sassoon House
Shirley St. & Victoria Avenue
PO Box N-272
Nassau, New Province
The Bahamas
January 1, 1997
555266 B.C. Ltd.
c/o 2539 Westhill Drive
West Vancouver, BC
V7S 3E4
Attention: Mr. David B. Jackson, President
- - - ----------
Dear Mr. Jackson:
RE: CONSULTANCY AGREEMENT WITH FEC
- - - ----------------------------------
Further to our various discussions, this letter serves to confirm and
acknowledge the arrangement reached between the two companies.
1. 555266 B.C. Ltd. will provide ongoing consulting services to FEC on all
matters relating to raising of capital, investor relations and introduction
of new products to FEC that fit with the company's philosophy and line of
business.
2. 555266 B.C. Ltd. shall be paid an annual consulting fee of US $125,000.00,
payable monthly. In addition to the consulting fee, 555266 B.C. Ltd. shall
also be reimbursed in full, any and all reasonable disbursements and out of
pocket expenses incurred in the course of providing the necessary services.
3. Since FEC is in a "start-up" stage and is not presently adequately funded, it
is agreed that the consulting fee due to 555266 B.C. Ltd. may, with mutual
prior agreement, be accrued from time to time. Should any of the consulting
fees be accrued, either 555266 B.C. Ltd. or David B. Jackson shall have the
right to apply any or all of the accrued consulting fees together with any
disbursements towards exercise of any options that may be set by FEC either
in the name or benefit of 555266 B.C. Ltd. or David B. Jackson.
<PAGE>
4. The commencement date of your services shall be January 1, 1997 and be
automatically renewed on each anniversary for one year unless otherwise
notified in writing.
5. 555266 B.C. Ltd. shall be solely responsible for all of its own corporate
expenses, including but not limited to office rent, assistant or substitute
and supplies that are used directly in the employee's work, etc.
I trust that the foregoing accurately reflects our discussions and
understanding. If you are in agreement with the above, please sign in the
appropriate space below, confirming the above arrangement.
Please execute and return to us one copy of this letter and retain the original
for your file and record.
Yours truly,
FORTUNE ENTERTAINMENT CORPORATION
Bryan M. Dear
We, the undersigned, hereby acknowledge and confirm the above arrangement with
FEC.
555266 B.C. LTD.
January 1, 1998 /s/ David B. Jackson
- - - ---------------------------------- ---------------------------------------
Date David B. Jackson
(President)
January 1, 1998 /s/ David B. Jackson
- - - ---------------------------------- ---------------------------------------
Date David B. Jackson
Encl.
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
Sassoon House
Shirley St. & Victoria Avenue
PO Box N-272
Nassau, New Province
The Bahamas
January 1, 1997
B.M.D. Financial Inc.
C/o T. Sigmund
Suite 204
2609 Westview Drive
North Vancouver, BC
V7N 4M2
Attention: Mr. Bryan M. Dear
- - - ---------
Dear Mr. Dear:
RE: CONSULTANCY AGREEMENT WITH FEC
- - - ----------------------------------
Further to our various discussions, this letter serves to confirm and
acknowledge the arrangement reached between the two companies.
1. BMD will provide ongoing consulting services to FEC on all matters relating
to public relations, investor relations and funding of FEC.
2. BMD shall be paid an annual consulting fee of US $125,000.00, payable
monthly. In addition to the consulting fee, BMD shall also be reimbursed in
full, any and all reasonable disbursements and out of pocket expenses
incurred in the course of providing the necessary services.
3. Since FEC is in a "start-up" stage and is not presently adequately funded, it
is agreed that the consulting fee due to BMD may, with mutual prior
agreement, be accrued from time to time. Should any of the consulting fees be
accrued, either BMD or Bryan M. Dear shall have the right to apply any or all
of the accrued consulting fees together with any disbursements towards
exercise of any warrants that may be set by FEC either in the name or benefit
of BMD or Bryan M. Dear.
4. The commencement date of your services shall be January 1, 1997 and be
automatically renewed on each anniversary for one year unless otherwise
notified in writing.
<PAGE>
5. Upon entering into this agreement, BMD shall be issued 500,000 warrants
entitling the holder to purchase one common share of FEC for each warrant at
a purchase price of $US 0.30 per share. The warrants shall have a term
commencing January 1, 1997 and expiring December 31, 2001. The Share Purchase
Warrant Certificate shall be in the form attached hereto as Schedule "I".
6. BMD Financial Inc. shall be solely responsible for all of its own corporate
expenses, including but not limited to office rent, assistant or substitute
and supplies that are used directly in the employee's work, etc.
I trust that the foregoing accurately reflects our discussions and
understanding. If you are in agreement with the above, please sign in the
appropriate space below, confirming the above arrangement.
Please execute and return to us one copy of this letter and retain the original
for your file and record.
Yours truly,
FORTUNE ENTERTAINMENT CORPORATION
/s/ David B. Jackson
- - - -----------------------------------
David B. Jackson
Chief Executive Officer & Director
We, the undersigned, hereby acknowledge and confirm the above arrangement with
FEC.
BMD FINANCIAL INC.
Jan. 1, 1997 /s/ Bryan M. Dear
- - - ------------------------------------- ---------------------------------------
Date Bryan M. Dear
(President)
Jan. 1, 1997 /s/ Bryan M. Dear
- - - ------------------------------------- ---------------------------------------
Date Bryan M. Dear
Encl.
<PAGE>
SCHEDULE "I"
SHARE PURCHASE WARRANT CERTIFICATE
WARRANT TO PURCHASE 500,000 COMMON SHARES
OF
FORTUNE ENTERTAINMENT CORPORATION
(Incorporated under the laws of the State of Delaware, U.S.A.)
SHARE PURCHASE WARRANT
(the "Warrant")
THIS SHARE PURCHASE WARRANT CERTIFICATE AND ANY SECURITIES ISSUED PURSUANT TO
THE TERMS HEREOF HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT
OF 1933, AS AMENDED (THE "ACT"). THE CORPORATION HOWEVER, HEREBY COVENANTS AND
UNDERTAKES TO EXERCISE ITS BEST EFFORT TO HAVE THE WARRANTS REGISTERED IN AN
APPROPRIATE FORM SO THAT THE SHARES CAN BE ISSUED WITHOUT ANY TRADING
RESTRICTIONS.
THIS IS TO CERTIFY THAT for value received, BMD Financial Inc. (the "Holder"),
is entitled to purchase 500,000 fully paid and non-assessable shares of U.S.
$0.0001 par value (each a "Share") in the common stock (the "Common Stock") of
FORTUNE ENTERTAINMENT CORPORATION (the "Corporation") at any time up to 5:00
p.m. local time in the City of Vancouver, Province of British Columbia, on
December 31, 2001 at a purchase price of U.S. $0.30 per Share.
1. The aforesaid right to purchase Shares may be exercised by the Holder at
times and from time to time within the time period required herein before set
out by (i) duly completing in the manner indicated and executing the
subscription form attached hereto, (ii) surrendering this Warrant either to
Continental Stock Transfer and Trust Company, at its principal office located
in New York, New York, U.S.A. or to the Corporate Secretary of the
Corporation, and, (iii) paying the appropriate purchase price for the Shares
subscribed for together with the requisite share transfer tax, if any, either
in cash or by certified cheque payable at par, in Vancouver, British
Columbia, to the order of the Corporation. Upon said surrender and payment,
the Corporation will issue to the Holder of the subscription form the number
of Shares subscribed for and the said Holder will become a shareholder of the
Corporation in respect of the Shares as of the date of such surrender and
payment. Subject to the Terms and Conditions of this Warrant, the Corporation
will, as soon as practicable after said surrender and payment, mail to the
person or persons at the address or addresses specified in the subscription
form a certificate or certificates evidencing the Shares subscribed for. If
the Holder of this Warrant subscribes for a lesser number of Shares than the
number of Shares referred to in this Warrant, the Holder shall be entitled to
receive a further Warrant in respect of Shares not subscribed for.
1
<PAGE>
2. The Holder may, at its sole discretion, transfer or assign the Share Purchase
Warrants to another party or parties.
3. Nothing contained herein shall confer any right upon the Holder hereof or any
other person to subscribe for or purchase any Shares at any time subsequent
to 5:00 o'clock in the afternoon (Vancouver time) on December 31, 2001, and,
from and after such time, this Warrant and all rights hereunder shall be void
and of no value.
4. This warrant shall not constitute the Holder a member of the Corporation.
5. This Warrant is subject to the Terms and Conditions that are attached to this
Warrant as Schedule "A".
6. Time shall be of the essence hereof.
IN WITNESS WHEREOF, FORTUNE ENTERTAINMENT CORPORATION has caused its
common seal to be affixed and this Warrant to be signed by its authorized
representative effective on this 1st day of January, 1997.
THE CORPORATE SEAL OF )
FORTUNE ENTERTAINMENT CORPORATION )
Was affixed hereto in the presence of: )
)
)
) c/s
- - - -------------------------------------- )
Authorized Signatory )
)
- - - -------------------------------------- )
Authorized Signatory )
2
<PAGE>
FORM OF SUBSCRIPTION
--------------------
To: FORTUNE ENTERTAINMENT CORPORATION
And To: CONTINENTAL STOCK TRANSFER AND TRUST COMPANY OR THE CORPORATE SECRETARY
OF FORTUNE ENTERTAINMENT CORPORATION
The undersigned holder of the attached Warrant hereby subscribes for____________
Shares of Common Stock of FORTUNE ENTERTAINMENT CORPORATION (again the
"Corporation") pursuant to the attached Warrant at a purchase price of U.S.
$0.30 per Share if subscribed for on or before 5:00 p.m. (Vancouver time) on
December 31, 2001. This subscription is accompanied by a certified cheque or
money order payable to, or to the order of, the Corporation for the whole amount
of the purchase price of the said Shares, together with the amount of any issue
tax that may be imposed on issue of such Shares (or if such tax has been paid,
evidence satisfactory to the trustee of such payment).
The undersigned hereby directs that the said Shares be registered as follows:
Name in Full Address Number of Shares
- - - ------------------------ ------------------------ ------------------------
- - - ------------------------ ------------------------ ------------------------
- - - ------------------------ ------------------------ ------------------------
DATED this ____ day of __________,19__
In the presence of:
- - - ------------------------------------- ---------------------------------------
Witness Signature of Warrant Holder
Please print your name and address in full:
Name:
----------------------------------------
Address:
-------------------------------------
-------------------------------------
3
<PAGE>
SCHEDULE "A"
TERMS AND CONDITIONS
Of
WARRANTS
These are the Terms and Conditions that are attached to the Share Purchase
Warrants issued by Fortune Entertainment Corporation.
ARTICLE ONE - INTERPRETATION
Section 1.01 - Definitions
- - - --------------------------
In these Terms and Conditions, unless there is something in the subject matter
or context inconsistent:
a) "Corporation" means Fortune Entertainment Corporation until a successor
corporation or its successor is present in Article 6;
b) "Corporations Auditors" means an independent firm of accountants duly
appointed as auditors of the Corporation;
c) "Director" means a director of the Corporation for the time being, and
reference, without more, to action by the directors of the Corporation as a
board, or whenever duly empowered, action by an executive committee of the
board;
d) "herein", "hereby" and similar expressions refer to these Terms and
Conditions as the same may be amended or modified from time to time; and the
expressions "Article" or "Section" followed by a number refer to the
specified Article or Section of these Terms and Conditions;
e) "Issuance Date" means that date on which the Corporation issued the attached
Warrants;
f) "person" means an individual, corporation, partnership, trustee or any
unincorporated organization, and any words importing persons have a similar
meaning;
g) "shares" means the U.S. $0.0001 par value common shares in the capital of the
Corporation as constituted at the Issuance Date and any shares resulting from
any subdivision or consolidation of the shares;
h) "Transfer Agent" means Continental Stock Transfer and Trust Company, of #2
Broadway, New York, New York, U.S.A., 10004;
4
<PAGE>
i) "Warrants" means the Warrants of the Corporation issued and presently
authorized, as set out in Section 2.01 and for the time being outstanding,
and any other warrants made subject to these Terms and Conditions;
j) "Warrant Holders" or "Holders" means the bearers of the Warrants for the time
being; and
k) words importing the singular number include the plural and vice-versa, and
words importing the masculine gender include the feminine and neuter genders.
Section 1.02 - Interpretation Not Affected By Headings
- - - -------------------------------------------------------
The division of these Terms and Conditions into Articles and Sections and the
insertion of headings are for convenience of reference only and will not affect
their construction of interpretation.
Section 1.03 - Applicable Law
- - - -----------------------------
The Warrants will be construed in accordance with the laws of British Columbia
and will be treated in all respects as British Columbia contracts.
ARTICLE TWO - ISSUE OF WARRANTS
Section 2.01 - Issue of Warrants
- - - --------------------------------
Warrants entitling the Holders thereof to purchase an aggregate of 500,000
shares and hereby authorized to be issued by the Corporation where one Warrant
is required to purchase one share of the Corporation.
Section 2.02 - Additional Warrants
- - - ----------------------------------
Nothing contained herein shall preclude the Corporation from time to time to
make further equity or debt offerings and sell additional shares, warrants or
grant options or similar rights to purchase shares of its capital stock.
Section 2.03 - Issue In Substitution For Lost Warrants
- - - ------------------------------------------------------
(a) Subject to Section 2.03(b), if a Warrant is mutilated, lost, destroyed or
stolen, the Corporation shall issue and deliver a new Warrant of like, date
and tenor as the one mutilated, lost, destroyed or stolen, in exchange for,
and in place of, and upon cancellation of such mutilated Warrant, or in lieu
of, and in substitution for such lost, destroyed or stolen Warrant. The
substituted Warrant will be entitled to the benefit of these Terms and
Conditions and rank equally in accordance with its terms with all other
Warrants issued, or to be issued, by the Corporation.
5
<PAGE>
(b) The applicant for the issue of a new Warrant will bear the cost of its issue
and in case of loss, destruction or theft, furnish to the Corporation such
evidence of ownership and of loss, destruction or theft of the Warrant so
lost, destroyed or stolen, as will be satisfactory to the Corporation in its
discretion, and such applicant may also be required to furnish indemnity in
an amount and form satisfactory to the Corporation, in its discretion, and
will pay the reasonable charges of the Corporation.
Section 2.04 - Warrant Holder Not a Shareholder
- - - ------------------------------------------------
The holding of a Warrant will not constitute the Holder a member of the
Corporation, nor entitle him to any right or interest except as expressly
provided in the Warrant and herein.
ARTICLE THREE - OWNERSHIP AND TRANSFER
Section 3.01 - Exchange of Warrants
- - - -----------------------------------
(a) Warrants in any authorized denomination may, upon compliance with the
reasonable requirements of the Corporation, be exchanged for Warrants in any
other authorized denomination, of the same class and date of expiry,
entitling the Holder to purchase any equal aggregate number of shares at the
same subscription price and on the same terms as the Warrants so exchanged.
(b) Warrants may be exchanged only at the office of the Transfer Agent or office
of the Corporate Secretary of the Corporation and any Warrants tendered for
exchange will be surrendered and cancelled.
Section 3.02 - Ownership and Transfer of Warrants
- - - -------------------------------------------------
(a) The Corporation and Transfer Agent may deem and treat the registered holder
of any Warrant as absolute owner of such Warrant, for all purposes, and will
not be affected by any notice or knowledge to the contrary.
(b) The registered holder of any Warrant will be entitled to the rights
evidenced by such Warrant free from all equities or rights of set-off or
counterclaim between the Corporation and the original or any intermediate
Holder and all persons may act accordingly, and the receipt of any such
bearer for the shares will be a good discharge to the corporation and the
Transfer Agent for the same and neither the Corporation nor the Transfer
Agent will be bound to inquire into the title of any such bearer.
6
<PAGE>
Section 3.03 - Notice to Warrant Holders
- - - ----------------------------------------
Any notice to be given to Warrant Holders will be deemed to be validly given on
the date on which it has been published if such notice is published once in the
City of Vancouver, such publication to be made in a daily newspaper in the
English language of general circulation in such city.
ARTICLE FOUR - EXERCISE OF WARRANTS
Section 4.01 - Method of Exercise Warrants
- - - ------------------------------------------
The right to purchase shares conferred by the Warrants may be exercised, before
its expiry time, by the Holder of such Warrant surrendering it, with a duly
completed and executed subscription in the form attached thereto and cash or a
certified cheque payable to or to the order of the Corporation, at par in such
city as the Corporation may reside from time to time, for the purchase price
applicable at the time of surrender in respect of the shares subscribed for in
lawful money of the United States of America, to the Transfer Agent at its
principal office in the City of New York, or to the Corporate Secretary of the
Corporation.
Section 4.02 - Effect of Exercise Warrants
- - - ------------------------------------------
As soon as practicable after surrender and payment, and subject to the Terms and
Conditions set forth herein, the Corporation will cause to be delivered to the
person or persons in whose name or names the shares subscribed for are to be
issued as specified in such subscription or mailed to him or them at his or
their respective addresses specified in such subscription, a certificate or
certificates for the appropriate number of shares not exceeding those which the
Warrant Holder is entitled to purchase pursuant to the Warrant surrendered. Upon
issuance, such person or persons shall be deemed to become the holder or holders
of record of such shares on the date of surrender and payment.
Section 4.03 - Subscription For Less than Entitlement
- - - -----------------------------------------------------
The Holder of any Warrant may subscribe for and purchase a number of shares less
than the number which he is entitled to purchase pursuant to the surrendered
Warrant. In the event of any purchase of a number of shares less than the number
that can be purchased pursuant to a Warrant, the Transfer Agent and/or the
Corporation will endorse the Warrant, note the number of Warrants exercised and
return the Warrant Certificate to the Holder or may issue a new Warrant in
respect of the balance of the shares which the Holder was entitled to purchase
pursuant to the surrendered Warrant and which were not then purchased.
7
<PAGE>
Section 4.04 - Warrants For Fractions of Shares
- - - -----------------------------------------------
To the extend that the Holder of any Warrant is entitled to receive on the
exercise or partial exercise, a fraction of a common share, such right may be
exercised in respect of such fraction only in combination with another Warrant
or other Warrants which in the aggregate entitles the Holder to receive a whole
number of such shares.
Section 4.05 - Expiration of Warrants
- - - -------------------------------------
After the expiration of the period within which a Warrant is exercisable, all
rights will wholly cease and terminate and such Warrant will be void and of no
effect.
Section 4.06 - Exercise Price
- - - -----------------------------
The price per share which must be paid to exercise a Warrant is as prescribed by
resolution of the Board of Directors of the Corporation and set forth on the
face of the Warrant Certificate.
Section 4.07 - Adjustment of Exercise Price
- - - -------------------------------------------
The exercise price and the number of shares deliverable upon the exercise of the
Warrants will be subject to adjustment in the events and in the manner
following:
(a) in the event of any subdivision or subdivisions of the shares of the
Corporation as such shares are constituted on the Issuance Date, at any time
while the Warrants are outstanding, into a greater number of shares, the
Corporation will deliver at the time of purchase of shares, in addition to
the number of shares in respect of which the right to purchase is then being
exercised, such additional number of shares as a result from such
subdivision or subdivisions without the bearer of the Warrant making any
additional payment or giving any other consideration;
(b) in the event of any consolidation or consolidations of the shares of the
Corporation as such shares are constituted on the Issuance Date, at any time
while the Warrants are outstanding, into a lesser number of shares, the
Corporation will deliver and the bearer will accept, at the time of
purchase, in lieu of the number of shares in respect of which the right to
purchase is then being exercised, the lesser number of shares as a result
from such consolidation or consolidations;
(c) in the event of any change of the shares of the Corporation as such shares
are constituted on the Issuance Date, at any time while the Warrants are
outstanding, the Corporation will deliver at the time of purchase the number
of shares of the appropriate class resulting from such change as the bearer
would have been entitled to receive in respect of the number of shares so
purchased, had the right to purchase been exercised before such change;
8
<PAGE>
(d) in the event of any capital reorganization, reclassification or change of
outstanding equity shares of the Corporation or in the event of any
consolidation, merger or amalgamation of the Corporation with or into any
other company, then the Holder of each Warrant then outstanding will have
the right to purchase and receive, in lieu of the shares receivable upon the
exercise of the rights represented by the Warrants, the kind and amount of
shares and other securities and property receivable upon such capital
reorganization, reclassification, change, consolidation, merger or
amalgamation which the Holder of a number of shares equal to the number of
shares receivable upon the exercise of the rights represented by the
Warrants would have received as a result of such event, but the subdivision
or consolidation of shares at any time outstanding into a greater or lesser
number of shares, whether with or without par value, will not be deemed to
be a capital reorganization or a reclassification of the capital of the
Corporation for the purposes of this paragraphs (d);
(e) if the Corporation, at any time while the Warrants are outstanding, pays any
stock dividend or stock dividends upon the shares of the Corporation in
respect of which the right to purchase is then given, the Corporation will
deliver at the time of purchase of shares in addition to the number of
shares in respect of which the right of purchase is then being exercised,
the additional number of shares of the appropriate class as would have been
payable on the shares so purchased as if they had been outstanding on the
record date for the payment of such stock dividend;
(f) the adjustments provided for in this Section in the subscription rights
pursuant to any Warrants are cumulative; and,
(g) the Corporation will not be required to issue fractional shares in
satisfaction of its obligations but, if any fractional interest in a shares
would, except for the provisions of this paragraph (g), be deliverable upon
the exercise of Warrant, the Corporation will, at its option, in lieu of
delivering a fractional share, satisfy the right to receive such fractional
interest by payment to the Holder of such Warrant of an amount in cash
equal, computed in the case of a fraction of a cent to the next lower cent,
to the current market value of the right to subscribe for such fractional
interest, computed on the basis of the last sale price of shares of the
Corporation of the Nasdaq Bulletin Board preceding the day on which such
exercise takes place.
9
<PAGE>
Section 4.08 - Determination of Adjustments
- - - -------------------------------------------
If any questions arise with respect to the exercise price, such question will be
conclusively determined by the Corporation's auditors, or, if they decline to
act, any other national firm of Chartered Accountants, in Vancouver, that the
Corporation may designate and who will have access to all appropriate records,
and such determination will be binding upon the Corporation and the Holders of
the Warrants.
ARTICLE FIVE - COVENANTS BY THE COMPANY
The Corporation will reserve and there will remain unissued out of its
authorized capital a sufficient number of shares to satisfy the rights of
purchase in the Warrants should the Holders of all the Warrants, from time to
time outstanding, determine to exercise such rights in respect of all shares
which they are or may be entitled to purchase pursuant thereto.
ARTICLE SIX - MODIFICATION OF TERMS, MERGER, SUCCESSORS
Section 6.01 - Modification of Terms for Certain Purposes
- - - ---------------------------------------------------------
From time to time the Corporation may modify these Terms and Conditions, for any
one or more, or all of the following purposes:
(a) adding to or altering these provisions in respect of the registration and
transfer of Warrants making provision for the exchange of Warrants of
different denominations; and making any modification in the form of the
Warrants which does not affect their substance;
(b) for any other purpose, including the correction of rectification of any
ambiguous, defective provisions, errors or omissions herein; or,
(c) to evidence any succession of any corporation and the assumption by any
successor of the covenants of the Corporation and in the Warrants contained
as provided in this Article.
Section 6.02 - No Extension of Expiry Date
- - - ------------------------------------------
Notwithstanding Section 6.01, no modification will be made to the Expiry Date of
Warrants without the prior consent of the Holder.
10
<PAGE>
Section 6.03 - Corporation May Consolidate etc. On Certain Terms
- - - ----------------------------------------------------------------
Nothing will prevent any consolidation, amalgamation or merger of the
Corporation with or into any other corporation or corporations, but the
corporation formed by such consolidation or into which such merger will have
been made will be a corporation organized and existing under the laws of Canada
or of the Untied States of America, or any Province, State, District or
Territory thereof, and will, simultaneously with such consolidation,
amalgamation or merger assume the due and punctual performance and observance of
all the covenants and conditions hereof to be performed or observed by the
Corporation.
Section 6.04 - Successor Corporation Substituted
- - - ------------------------------------------------
In case the Corporation is consolidated, amalgamated or merged with or into any
other corporation or corporations, the successor corporation formed by such
consolidation or amalgamation, or into which the Corporation will have been
merged, will succeed to and be substituted for the Corporation hereunder. Such
changes in phraseology and form (but not in substance) may be made in the
Warrants as may be appropriate in view of such consolidation, amalgamation or
merger.
11
<PAGE>
FEC LETTERHEAD
April 1, 1998
Moorgate Management Inc. (in formation)
C/O Douglas Seppala
DuMoulin Black
10th Floor - 595 Howe Street
Vancouver, BC V6C 2T5
Attention: Mr. Firoz Lakhani:
- - - ---------
Dear Mr. Lakhani:
RE: CONSULTING AGREEMENT WITH FEC
- - - ---------------------------------
Pursuant to our various meetings and discussions pertaining to the engagement of
your services, this letter serves to confirm and acknowledge the arrangements
reached between Moorgate Management, Inc. (in formation) and FEC.
1. Moorgate will provide ongoing consulting services to FEC on all matters
relating to management, operation and corporate secretarial services. In
addition, Moorgate will assist in compilation of material for the drafting
and preparation of a corporate business plan and the 10SB filing with the
SEC to enable FEC to become a reporting issuer.
2. Moorgate shall be paid an annual consulting fee of US $125,000 payable
monthly. In addition to the consulting fee, FEC will also be responsible for
any and all reasonable disbursements and out of pocket expenses incurred by
Moorgate in the course of it providing the necessary services.
3. Since FEC is presently in a "start-up" mode, and is not adequately funded, we
have agreed that the consulting fee due to Moorgate may, with mutual prior
agreement, be accrued from time to time. Should any of the consulting fee be
accrued, either Moorgate or Firoz Lakhani shall have the right to apply any
or all of the accrued consulting fees, together with any outstanding
disbursements toward exercise of any options that may be set by FEC either in
the name of Moorgate or Firoz Lakhani.
4. The commencement date of your services shall be April 1, 1998 and be
automatically renewed on each anniversary for one year, unless otherwise
notified in writing.
5. Upon entering into this agreement, Moorgate shall be issued a signing bonus
of 200,000 common shares of FEC subject to rules and regulations of SEC.
<PAGE>
FEC LETTERHEAD
6. As a further inducement, Moorgate shall be issued 400,000 warrants entitling
the holder to purchase one common share of FEC for each warrant so issued at
a purchase price of US $ 0.35. The warrants shall have a term of five (5)
years commencing April 1, 1998 and expiring March 31, 2003. The Share
Purchase Warrant Certificate shall be in the form attached hereto as Schedule
"I".
7. Moorgate shall be solely responsible for all of its own corporate expenses,
including but not limited to office rent, assistant or substitute and
supplies that are used directly in the employee's work, etc.
Both parties hereby confirm and acknowledge that Moorgate Management Inc. is in
the process of being formed and is not currently in existence; except that the
name has been reserved. In the event Moorgate Management Inc. is not
incorporated, for whatever reason, this agreement shall deem to be in the name
of Firoz Lakhani, with Mr. Firoz Lakhani having full rights to assign this
agreement to a management company of his choice.
Please review the foregoing and if the same accurately reflects our
understanding, please be so good as to sign in the appropriate space below,
confirming the above arrangement.
Kindly execute both copies of this letter agreement, retain the original for
your files and return the enclosed copy to the writer's attention.
Yours truly,
FORTUNE ENTERTAINMENT CORPORATION
/s/ David B. Jackson
- - - --------------------------------------
David B. Jackson
Chief Executive Office & Director
We, the undersigned, hereby acknowledge and confirm the above arrangement for
consulting services for FEC.
MOORGATE MANAGEMENT INC.
April 01 / 1998 /s/ Firoz Lakhani
- - - ------------------------------------- ----------------------------------------
Date Firoz Lakhani
(President)
April 01 / 1998 /s/ Firoz Lakhani
- - - ------------------------------------- ----------------------------------------
Date Firoz Lakhani
Encl.
<PAGE>
SCHEDULE "I"
------------
SHARE PURCHASE WARRANT CERTIFICATE
----------------------------------
WARRANT TO PURCHASE 400,000 COMMON SHARES
OF
FORTUNE ENTERTAINMENT CORPORATION
(Incorporated under the laws of the State of Delaware, U.S.A.)
SHARE PURCHASE WARRANT
(the "Warrant")
THIS SHARE PURCHASE WARRANT CERTIFICATE AND ANY SECURITIES ISSUED PURSUANT TO
THE TERMS HEREOF HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT
OF 1933, AS AMENDED (THE "ACT"). THE CORPORATION HOWEVER, HEREBY COVENANTS AND
UNDERTAKES TO EXERCISE ITS BEST EFFORT TO HAVE THE WARRANTS REGISTERED IN AN
APPROPRIATE FORM SO THAT THE SHARES CAN BE ISSUED WITHOUT ANY TRADING
RESTRICTONS.
THIS IS TO CERTIFY THAT for value received, Moorgate Management Inc. (the
"Holder"), is entitled to purchase 400,000 fully paid and non-assessable shares
of U.S. $0.0001 par value (each a "Share") in the common stock (the "Common
Stock") of FORTUNE ENTERTAINMENT CORPORATION (the "Corporation") at any time up
to 5:00 p.m. local time in the City of Vancouver, Province of British Columbia,
on March 31, 2003 at a purchase price of U.S. $0.35 per Share.
1. The aforesaid right to purchase Shares may be exercised by the Holder at
times and from time to time within the time period required herein before set
out by (i) duly completing in the manner indicated and executing the
subscription form attached hereto, (ii) surrendering this Warrant either to
Continental Stock Transfer and Trust Company, at its principal office located
in New York, New York, U.S.A. or to the Corporate Secretary of the
Corporation, and, (iii) paying the appropriate purchase price for the Shares
subscribed for together with the requisite share transfer tax, if any, either
in cash or by certified cheque payable at par, in Vancouver, British
Columbia, to the order of the Corporation. Upon said surrender and payment,
the Corporation will issue to the Holder of the subscription form the number
of Shares subscribed for and the said Holder will become a shareholder of the
Corporation in respect of the Shares as of the date of such surrender and
payment. Subject to the Terms and Conditions of this Warrant, the Corporation
will, as soon as practicable after said surrender and payment, mail to the
person or persons at the address or addresses specified in the subscription
form a certificate or certificates evidencing the Shares subscribed for. If
the Holder of this Warrant subscribes for a lesser number of Shares than the
number of Shares referred to in this Warrant, the Holder shall be entitled to
receive a further Warrant in respect of Shares not subscribed for.
1
<PAGE>
2. The Holder may, at its sole discretion, transfer or assign the Share Purchase
Warrants to another party or parties.
3. Nothing contained herein shall confer any right upon the Holder hereof or any
other person to subscribe for or purchase any Shares at any time subsequent
to 5:00 o'clock in the afternoon (Vancouver time) on March 31, 2003, and,
from and after such time, this Warrant and all rights hereunder shall be void
and of no value.
4. This warrant shall not constitute the Holder a member of the Corporation.
5. This Warrant is subject to the Terms and Conditions that are attached to this
Warrant as Schedule "A".
6. Time shall be of the essence hereof.
IN WITNESS WHEREOF, FORTUNE ENTERTAINMENT CORPORATION has caused its common seal
to be affixed and this Warrant to be signed by its authorized representative
effective on this 1st day of April, 1998.
THE CORPORATE SEAL OF )
FORTUNE ENTERTAINMENT CORPORATION )
Was affixed hereto in the presence of: )
)
)
) c/s
- - - -------------------------------------- )
Authorized Signatory )
)
- - - -------------------------------------- )
Authorized Signatory )
2
<PAGE>
FORM OF SUBSCRIPTION
--------------------
To: FORTUNE ENTERTAINMENT CORPORATION
And To: CONTINENTAL STOCK TRANSFER AND TRUST COMPANY OR THE CORPORATE SECRETARY
OF FORTUNE ENTERTAINMENT CORPORATION
The undersigned holder of the attached Warrant hereby subscribes for____________
Shares of Common Stock of FORTUNE ENTERTAINMENT CORPORATION (again the
"Corporation") pursuant to the attached Warrant at a purchase price of U.S.
$0.35 per Share if subscribed for on or before 5:00 p.m. (Vancouver time) on
March 31, 2003. This subscription is accompanied by a certified cheque or money
order payable to, or to the order of, the Corporation for the whole amount of
the purchase price of the said Shares, together with the amount of any issue tax
that may be imposed on issue of such Shares (or if such tax has been paid,
evidence satisfactory to the trustee of such payment).
The undersigned hereby directs that the said Shares be registered as follows:
Name in Full Address Number of Shares
- - - ------------------------ ------------------------ ------------------------
- - - ------------------------ ------------------------ ------------------------
- - - ------------------------ ------------------------ ------------------------
DATED this ____ day of __________,19__
In the presence of:
- - - ------------------------------------- ---------------------------------------
Witness Signature of Warrant Holder
Please print your name and address in full:
Name:
----------------------------------------
Address:
-------------------------------------
-------------------------------------
3
<PAGE>
SCHEDULE "A"
TERMS AND CONDITIONS
OF
WARRANTS
These are the Terms and Conditions that are attached to the Share Purchase
Warrants issued by Fortune Entertainment Corporation.
ARTICLE ONE - INTERPRETATION
Section 1.01 - Definitions
In these Terms and Conditions, unless there is something in the subject matter
or context inconsistent:
a) "Corporation" means Fortune Entertainment Corporation until a successor
corporation or its successor is present in Article 6;
b) "Corporations Auditors" means an independent firm of accountants duly
appointed as auditors of the Corporation;
c) "Director" means a director of the Corporation for the time being, and
reference, without more, to action by the directors of the Corporation as a
board, or whenever duly empowered, action by an executive committee of the
board;
d) "herein", "hereby" and similar expressions refer to these Terms and
Conditions as the same may be amended or modified from time to time; and
the expressions "Article" or "Section" followed by a number refer to the
specified Article or Section of these Terms and Conditions;
e) "Issuance Date" means that date on which the Corporation issued the attached
Warrants;
f) "person" means an individual, corporation, partnership, trustee or any
unincorporated organization, and any words importing persons have a similar
meaning;
g) "shares" means the U.S. $0.0001 par value common shares in the capital of
the Corporation as constituted at the Issuance Date and any shares resulting
from any subdivision or consolidation of the shares;
h) "Transfer Agent" means Continental Stock Transfer and Trust Company, of #2
Broadway, New York, New York, U.S.A., 10004;
4
<PAGE>
i) "Warrants" means the Warrants of the Corporation issued and presently
authorized, as set out in Section 2.01 and for the time being outstanding,
and any other warrants made subject to these Terms and Conditions;
j) "Warrant Holders" or "Holders" means the bearers of the Warrants for the
time being; and
k) words importing the singular number include the plural and vice-versa, and
words importing the masculine gender include the feminine and neuter
genders.
Section 1.02 - Interpretation Not Affected By Headings
The division of these Terms and Conditions into Articles and Sections and the
insertion of headings are for convenience of reference only and will not affect
their construction of interpretation.
Section 1.03 - Applicable Law
The Warrants will be construed in accordance with the laws of British Columbia
and will be treated in all respects as British Columbia contracts.
ARTICLE TWO - ISSUE OF WARRANTS
Section 2.01 - Issue of Warrants
Warrants entitling the Holders thereof to purchase an aggregate of 400,000
shares and hereby authorized to be issued by the Corporation where one Warrant
is required to purchase one share of the Corporation.
Section 2.02 - Additional Warrants
Nothing contained herein shall preclude the Corporation from time to time to
make further equity or debt offerings and sell additional shares, warrants or
grant options or similar rights to purchase shares of its capital stock.
Section 2.03 - Issue In Substitution For Lost Warrants
(a) Subject to Section 2.03(b), if a Warrant is mutilated, lost, destroyed or
stolen, the Corporation shall issue and deliver a new Warrant of like, date
and tenor as the one mutilated, lost, destroyed or stolen, in exchange for,
and in place of, and upon cancellation of such mutilated Warrant, or in lieu
of, and in substitution for such lost, destroyed or stolen Warrant. The
substituted Warrant will be entitled to the benefit of these Terms and
Conditions and rank equally in accordance with its terms with all other
Warrants issued, or to be issued, by the Corporation.
5
<PAGE>
(b) The applicant for the issue of a new Warrant will bear the cost of its issue
and in case of loss, destruction or theft, furnish to the Corporation such
evidence of ownership and of loss, destruction or theft of the Warrant so
lost, destroyed or stolen, as will be satisfactory to the Corporation in its
discretion, and such applicant may also be required to furnish indemnity in
an amount and form satisfactory to the Corporation, in its discretion, and
will pay the reasonable charges of the Corporation.
Section 2.04 - Warrant Holder Not a Shareholder
The holding of a Warrant will not constitute the Holder a member of the
Corporation, nor entitle him to any right or interest except as expressly
provided in the Warrant and herein.
ARTICLE THREE - OWNERSHIP AND TRANSFER
Section 3.01 - Exchange of Warrants
(a) Warrants in any authorized denomination may, upon compliance with the
reasonable requirements of the Corporation, be exchanged for Warrants in any
other authorized denomination, of the same class and date of expiry,
entitling the Holder to purchase any equal aggregate number of shares at the
same subscription price and on the same terms as the Warrants so exchanged.
(b) Warrants may be exchanged only at the office of the Transfer Agent or office
of the Corporate Secretary of the Corporation and any Warrants tendered for
exchange will be surrendered and cancelled.
Section 3.02 - Ownership and Transfer of Warrants
(a) The Corporation and Transfer Agent may deem and treat the registered holder
of any Warrant as absolute owner of such Warrant, for all purposes, and will
not be affected by any notice or knowledge to the contrary.
(b) The registered holder of any Warrant will be entitled to the rights
evidenced by such Warrant free from all equities or rights of set-off or
counterclaim between the Corporation and the original or any intermediate
Holder and all persons may act accordingly, and the receipt of any such
bearer for the shares will be a good discharge to the corporation and the
Transfer Agent for the same and neither the Corporation nor the Transfer
Agent will be bound to inquire into the title of any such bearer.
6
<PAGE>
Section 3.03 - Notice to Warrant Holders
Any notice to be given to Warrant Holders will be deemed to be validly given on
the date on which it has been published if such notice is published once in the
City of Vancouver, such publication to be made in a daily newspaper in the
English language of general circulation in such city.
ARTICLE FOUR - EXERCISE OF WARRANTS
Section 4.01 - Method of Exercise Warrants
The right to purchase shares conferred by the Warrants may be exercised, before
its expiry time, by the Holder of such Warrant surrendering it, with a duly
completed and executed subscription in the form attached thereto and cash or a
certified cheque payable to or to the order of the Corporation, at par in such
city as the Corporation may reside from time to time, for the purchase price
applicable at the time of surrender in respect of the shares subscribed for in
lawful money of the United States of America, to the Transfer Agent at its
principal office in the City of New York, or to the Corporate Secretary of the
Corporation.
Section 4.02 - Effect of Exercise Warrants
As soon as practicable after surrender and payment, and subject to the Terms and
Conditions set forth herein, the Corporation will cause to be delivered to the
person or persons in whose name or names the shares subscribed for are to be
issued as specified in such subscription or mailed to him or them at his or
their respective addresses specified in such subscription, a certificate or
certificates for the appropriate number of shares not exceeding those which the
Warrant Holder is entitled to purchase pursuant to the Warrant surrendered. Upon
issuance, such person or persons shall be deemed to become the holder or holders
of record of such shares on the date of surrender and payment.
Section 4.03 - Subscription For Less than Entitlement
The Holder of any Warrant may subscribe for and purchase a number of shares less
than the number which he is entitled to purchase pursuant to the surrendered
Warrant. In the event of any purchase of a number of shares less than the number
that can be purchased pursuant to a Warrant, the Transfer Agent and/or the
Corporation will endorse the Warrant, note the number of Warrants exercised and
return the Warrant Certificate to the Holder or may issue a new Warrant in
respect of the balance of the shares which the Holder was entitled to purchase
pursuant to the surrendered Warrant and which were not then purchased.
7
<PAGE>
Section 4.04 - Warrants For Fractions of Shares
To the extend that the Holder of any Warrant is entitled to receive on the
exercise or partial exercise, a fraction of a common share, such
right may be exercised in respect of such fraction only in combination with
another Warrant or other Warrants which in the aggregate entitles the Holder to
receive a whole number of such shares.
Section 4.05 - Expiration of Warrants
After the expiration of the period within which a Warrant is exercisable, all
rights will wholly cease and terminate and such Warrant will be void and of no
effect.
Section 4.06 - Exercise Price
The price per share which must be paid to exercise a Warrant is as prescribed by
resolution of the Board of Directors of the Corporation and set forth on the
face of the Warrant Certificate.
Section 4.07 - Adjustment of Exercise Price
The exercise price and the number of shares deliverable upon the exercise of the
Warrants will be subject to adjustment in the events and in the manner
following:
(a) in the event of any subdivision or subdivisions of the shares of the
Corporation as such shares are constituted on the Issuance Date, at any time
while the Warrants are outstanding, into a greater number of shares, the
Corporation will deliver at the time of purchase of shares, in addition to
the number of shares in respect of which the right to purchase is then being
exercised, such additional number of shares as a result from such
subdivision or subdivisions without the bearer of the Warrant making any
additional payment or giving any other consideration;
(b) in the event of any consolidation or consolidations of the shares of the
Corporation as such shares are constituted on the Issuance Date, at any time
while the Warrants are outstanding, into a lesser number of shares, the
Corporation will deliver and the bearer will accept, at the time of
purchase, in lieu of the number of shares in respect of which the right to
purchase is then being exercised, the lesser number of shares as a result
from such consolidation or consolidations;
(c) in the event of any change of the shares of the Corporation as such shares
are constituted on the Issuance Date, at any time while the Warrants are
outstanding, the Corporation will deliver at the time of purchase the number
of shares of the appropriate class resulting from such change as the bearer
would have been entitled to receive in respect of the number of
8
<PAGE>
shares so purchased, had the right to purchase been exercised before such
change;
(d) in the event of any capital reorganization, reclassification or change of
outstanding equity shares of the Corporation or in the event of any
consolidation, merger or amalgamation of the Corporation with or into any
other company, then the Holder of each Warrant then outstanding will have
the right to purchase and receive, in lieu of the shares receivable upon the
exercise of the rights represented by the Warrants, the kind and amount of
shares and other securities and property receivable upon such capital
reorganization, reclassification, change, consolidation, merger or
amalgamation which the Holder of a number of shares equal to the number of
shares receivable upon the exercise of the rights represented by the
Warrants would have received as a result of such event but the subdivision
or consolidation of shares at any time outstanding into a greater or lesser
number of shares, whether with or without par value, will not be deemed to
be a capital reorganization or a reclassification of the capital of the
Corporation for the purposes of this paragraphs (d);
(e) if the Corporation, at any time while the Warrants are outstanding, pays any
stock dividend or stock dividends upon the shares of the Corporation in
respect of which the right to purchase is then given, the Corporation will
deliver at the time of purchase of shares in addition to the number of
shares in respect of which the right of purchase is then being exercised,
the additional number of shares of the appropriate class as would have been
payable on the shares so purchased as if they had been outstanding on the
record date for the payment of such stock dividend;
(f) the adjustments provided for in this Section in the subscription rights
pursuant to any Warrants are cumulative; and,
(g) the Corporation will not be required to issue fractional shares in
satisfaction of its obligations but, if any fractional interest in a shares
would, except for the provisions of this paragraph (g), be deliverable upon
the exercise of Warrant, the Corporation will, at its option, in lieu of
delivering a fractional share, satisfy the right to receive such fractional
interest by payment to the Holder of such Warrant of an amount in cash
equal, computed in the case of a fraction of a cent to the next lower cent,
to the current market value of the right to subscribe for such fractional
interest, computed on the basis of the last sale price of shares of the
Corporation of the Nasdaq Bulletin Board preceding the day on which such
exercise takes place.
9
<PAGE>
Section 4.08 - Determination of Adjustments
If any questions arise with respect to the exercise price, such question will be
conclusively determined by the Corporation's auditors, or, if they decline to
act, any other national firm of Chartered Accountants, in Vancouver, that the
Corporation may designate and who will have access to all appropriate records,
and such determination will be binding upon the Corporation and the Holders of
the Warrants.
ARTICLE FIVE - COVENANTS BY THE COMPANY
The Corporation will reserve and there will remain unissued out of its
authorized capital a sufficient number of shares to satisfy the rights of
purchase in the Warrants should the Holders of all the Warrants, from time to
time outstanding, determine to exercise such rights in respect of all shares
which they are or may be entitled to purchase pursuant thereto.
ARTICLE SIX - MODIFICATION OF TERMS, MERGER, SUCCESSORS
Section 6.01 - Modification of Terms for Certain Purposes
From time to time the Corporation may modify these Terms and Conditions, for any
one or more, or all of the following purposes:
(a) adding to or altering these provisions in respect of the registration and
transfer of Warrants making provision for the exchange of Warrants of
different denominations; and making any modification in the form of the
Warrants which does not affect their substance;
(b) for any other purpose, including the correction of rectification of any
ambiguous, defective provisions, errors or omissions herein; or,
(c) to evidence any succession of any corporation and the assumption by any
successor of the covenants of the Corporation and in the Warrants contained
as provided in this Article.
Section 6.02 - No Extension of Expiry Date
Notwithstanding Section 6.01, no modification will be made to the Expiry Date of
Warrants without the prior consent of the Holder.
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<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
1998 INCENTIVE STOCK OPTION PLAN
1. Purpose. The purpose of the 1998 Incentive Stock Option Plan (the
"Plan") is to advance the interests of Fortune Entertainment Corporation and any
subsidiary corporation (hereinafter referred to as the "Company") and all of its
shareholders, by strengthening the Company's ability to attract and retain in
its employ individuals of training, experience, and ability, and to furnish
additional incentive to officers and valued employees upon whose judgment,
initiative, and efforts the successful conduct and development of its business
largely depends, by encouraging such officers and employees to become owners of
capital stock of the Company.
This will be effected through the granting of stock options as herein
provided, which options are intended to qualify as "Incentive Stock Options"
within the meaning of Section 422 of the Internal Revenue Code, as amended (the
"Code").
2. Definitions.
(a) "Board" means the Board of Directors of the Company.
(b) "Committee" means the directors duly appointed to administer the
Plan.
(c) "Common Stock" means the Company's Common Stock.
(d) "Date of Grant" means the date on which an Option is granted under
the Plan.
(e) "Option" means an Option granted under the Plan.
(f) "Optionee" means a person to whom an Option, which has not expired,
has been granted under the Plan.
(g) "Successor" means the legal representative of the estate of a
deceased optionee or the person or persons who acquire the right to exercise an
Option by bequest or inheritance or by reason of the death of any Optionee.
3. Administration of Plan. The Plan shall be administered by the
Company's Board of Directors or in the alternative, by a committee of two or
more directors appointed by the Board (the "Committee"). If a Committee should
be appointed, the Committee shall report all action taken by it to the Board.
The Committee shall have full and final authority in its discretion, subject to
the provisions of the Plan, to determine the individuals to whom and the time or
times at which Options shall be granted and the number of shares and purchase
price of Common Stock covered by each
<PAGE>
Option; to construe and interpret the Plan; to determine the terms and
provisions of the respective Option agreements, which need not be identical,
including, but without limitation, terms covering the payment of the Option
Price; and to make all other determinations and take all other actions deemed
necessary or advisable for the proper administration of the Plan. All such
actions and determinations shall be conclusively binding for all purposes and
upon all persons.
4. Common Stock Subject to Options. The aggregate number of shares of
the Company's Common Stock which may be issued upon the exercise of Options
granted under the Plan shall not exceed 2,000,000, subject to adjustment under
the provisions of paragraph 9. The shares of Common Stock to be issued upon the
exercise of Options may be authorized but unissued shares, shares issued and
reacquired by the Company or shares bought on the market for the purposes of the
Plan. In the event any Option shall, for any reason, terminate or expire or be
surrendered without having been exercised in full, the shares subject to such
Option but not purchased thereunder shall again be available for Options to be
granted under the Plan.
The aggregate fair market value (determined as of the time any option
is granted) of the stock for which any employee may be granted options which are
first exercisable in any single calendar year under this Plan (and any other
plan of the Company meeting the requirements for Incentive Stock Option Plans)
shall not exceed $100,000.
5. Participants. Options will be granted only to persons who are
employees of the Company and only in connection with any such person's
employment. The term "employees" shall include officers as well as other
employees, and the officers and other employees who are directors of the
Company. The Committee will determine the employees to be granted options and
the number of shares subject to each option.
6. Term and Conditions of Options. Any Option granted under the Plan
shall be evidenced by an agreement executed by the Company and the recipient
and shall contain such terms and be in such form as the Committee may from time
to time approve, subject to the following limitations and conditions:
(a) Option Price. The purchase price of each option shall not
be less than 100% of the fair market value of the Company's common stock at the
time of the granting of the option provided, however, if the optionee, at the
time the option is granted, owns stock possessing more than 10% of the total
combined voting power of all classes of stock of the Company, the purchase price
of the option shall not be less than 110% of the fair market value of the stock
at the time of the granting of the option.
(b) Period of Option. The maximum period for exercising an
option shall be 10 years from the date upon which the option is granted,
provided, however, if the optionee, at the time the option is granted, owns
stock possessing more than 10% of the
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<PAGE>
total combined voting power of all classes of stock of the Company, the maximum
period for exercising an option shall be five years from the date upon which the
option is granted and provided further, however, that these periods may be
shortened in accordance with the provisions of this Plan.
Subject to the foregoing, the period during which each option
may be exercised, and the expiration date of each Option shall be fixed by the
Committee.
(c) Vesting of Shareholder Rights. Neither an Optionee nor his
successor shall have any rights as a shareholder of the Company until the
certificates evidencing the shares purchased are properly delivered to such
Optionee or his successor.
(d) Exercise of Option. Each Option shall be exercisable from
time to time during a period (or periods) determined by the Committee and ending
upon the expiration or termination of the Option; provided, however, the
Committee may, by the provisions of any Option Agreement, limit the number of
shares purchasable thereunder in any period or periods of time during which the
Option is exercisable. An Option shall not be exercisable in whole or in part
prior to the date of shareholder approval of the Plan.
Options may be exercised in part from time to time during the
option period. The exercise of any option will be contingent upon compliance by
the Optionee (or purchaser acting pursuant to Section 6(b)) with the provisions
of Section 10 below and upon receipt by the Company of either (i) cash or
certified bank check payable to its order in the amount of the purchase price of
such shares (ii) shares of Company stock having a fair market value equal to the
purchase price of such shares, or (iii) a combination of (i) and (ii). If any
law or regulation requires the Company to take any action with respect to the
shares to be issued upon exercise of any option, then the date for delivery of
such stock shall be extended for the period necessary to take such action.
(c) Nontransferability of Option. No Option shall be
transferable or assignable by an Optionee, otherwise than by will or the laws of
descent and distribution and each Option shall be exercisable, during the
Optionee's lifetime, only by him. No Option shall be pledged or hypothecated in
any way and no Option shall be subject to execution, attachment or similar
process except with the express consent of the Committee.
(f) Death of Optionee. In the event of the death of an
optionee while in the employ of the Company, the option theretofore granted to
him shall be exercisable only within the three months succeeding such death and
then only (i) by the person or persons to whom the optionee's rights under the
option shall pass by the optionee's will or by the laws of descent and
distribution, and (ii) if and to the extent that he was entitled to exercise the
option at the date of his death.
3
<PAGE>
7. Assumed Options. In connection with any transaction to which Section
424(a) of the Code is applicable, options may be granted pursuant hereto in
substitution of existing options or existing options may be assumed as
prescribed by that Section and any regulations issued thereunder.
Notwithstanding anything to the contrary contained in this Plan, options granted
pursuant to this Paragraph shall be at prices and shall contain such terms,
provisions, and conditions as may be determined by the Committee and shall
include such provisions and conditions as may be necessary to meet the
requirements of Section 424(a) of the Code.
8. Certain Dispositions of Shares. Any options granted pursuant to this
Plan shall be conditioned such that if, within the earlier of (i) the two-year
period beginning on the date of grant of an option or (ii) the one-year period
beginning on the date after which any share of stock is transferred to an
individual pursuant to his exercise of an option, such an individual makes a
disposition of such share of stock by way of sale, exchange, gift, transfer of
legal title, or otherwise, such individual shall promptly report such
disposition to the Company in writing and shall furnish to the Company such
details concerning such disposition as the Company may reasonably request.
9. Reclassification, Consolidation, or Merger. If and to the extent
that the number of issued shares of Common Stock of the Corporation shall be
increased or reduced by change in par value, split up, reclassification,
distribution of a dividend payable in stock, or the like, the number of shares
subject to Option and the Option price per share shall be proportionately
adjusted by the Committee, whose determination shall be conclusive. If the
Corporation is reorganized or consolidated or merged with another corporation,
an Optionee granted an Option hereunder shall be entitled to receive Options
covering shares of such reorganized, consolidated, or merged company in the same
proportion, at an equivalent price, and subject to the same conditions. The new
Option or assumption of the old Option shall not give Optionee additional
benefits which he did not have under the old Option, or deprive him of benefits
which he had under the old Option.
10. Restrictions on Issuing Shares. The exercise of each Option shall
be subject to the condition that if at any time the Company shall determine in
its discretion that the satisfaction of withholding tax or other withholding
liabilities, or that the listing, registration, or qualification of any shares
otherwise deliverable upon such exercise upon any securities exchange or under
any state or federal law, or that the consent or approval of any regulatory
body, is necessary or desirable as a condition of, or in connection with, such
exercise or the delivery or purchase of shares purchased thereto, then in any
such event, such exercise shall not be effective unless such withholding,
listing, registration, qualification, consent, or approval shall have been
effected or obtained free of any conditions not acceptable to the Company.
Unless the shares of stock covered by the Plan have been registered
with the Securities and Exchange Commission pursuant to Section 5 of the
Securities Act of 1933, each optionee shall, by accepting an option, represent
and agree, for himself and his
4
<PAGE>
transferees by will or the laws of descent and distribution, that all shares of
stock purchased upon the exercise of the option will be acquired for investment
and not for resale or distribution. Upon such exercise of any portion of an
option, the person entitled to exercise the same shall, upon request of the
Company, furnish evidence satisfactory to the Company (including a written and
signed representation) to the effect that the shares of stock are being acquired
in good faith for investment and not for resale or distribution. Furthermore,
the Company may, if it deems appropriate, affix a legend to certificates
representing shares of stock purchased upon exercise of options indicating that
such shares have not been registered with the Securities and Exchange Commission
and may so notify its transfer agent. Such shares may be disposed of by an
optionee in the following manner only: (1) pursuant to an effective registration
statement covering such resale or reoffer, (2) pursuant to an applicable
exemption from registration as indicated in a written opinion of counsel
acceptable to the Company, or (3) in a transaction that meets all the
requirements of Rule 144 of the Securities and Exchange Commission. If shares of
stock covered by the Plan have been registered with the Securities and Exchange
Commission, no such restrictions on resale shall apply, except in the case of
optionees who are directors, officers, or principal shareholders of the Company.
Such persons may dispose of shares only by one of the three aforesaid methods.
11. Use of Proceeds. The proceeds received by the Company from the sale
of Common Stock pursuant to the exercise of Options granted under the Plan shall
be added to the Company's general funds and used for general corporate
purposes.
12. Amendment Suspension, and Termination of Plan. The Board of
Directors may alter, suspend, or discontinue the Plan, but may not without the
approval of a majority of those holders of the Company's Common Stock voting in
person or by proxy at any meeting of the Company's shareholders, make any
alteration or amendment thereof which operates to (a) abolish the Committee,
change the qualification of its members, or withdraw the administration of the
Plan from its supervision, (b) make any material change in the class of eligible
employees as defined in Section 5, (c) increase the total number of shares
reserved for purposes of this Plan except as provided in Section 9, (d) increase
the total number of shares for which an option or options may be granted to any
one employee. (e) extend the term of the Plan or the maximum option periods
provided in paragraph 6, (f) decrease the minimum option price provided in
paragraph 6, except as provided in paragraph 9, or (g) materially increase the
benefits accruing to employees participating under this Plan.
Unless the Plan shall theretofore have been terminated by the Board,
the Plan shall terminate ten years after the effective date of the Plan. No
Option may be granted during any suspension or after the termination of the
Plan. No amendment, suspension, or termination of the Plan shall, without an
Optionees consent, alter or impair any of the rights or obligations under any
Option theretofore granted to such Optionee under the Plan.
5
<PAGE>
13. Limitations. Every right of action by or on behalf of the Company
or by any shareholder against any past, present or future member of the Board,
or any officer or employee of the Company arising out of or in connection with
this Plan shall, irrespective of the place where such action may be brought and
irrespective of the place of residence of any such director, officer or employee
cease and be barred by the expiration of one year from whichever is the later of
(a) the date of the act or omission in respect of which such right of action
arises; or (b) the first date upon which there has been made generally available
to shareholders an annual report of the Company or any proxy statement for the
annual meeting of shareholders following the issuance of such annual report,
which annual report and proxy statement alone or together set forth, for the
related period, the number of shares issuable upon the exercise of the options
granted pursuant to this Plan; and any and all right of action by any employee
(past, present or future) against the Company arising out of or in connection
with this Plan shall, irrespective of the place where such action may be
brought, cease and be barred by the expiration of one year from the date of the
act or omission in respect of which such right of action arises.
14. Effective Date of the Plan.
This Plan shall become effective upon the adoption thereof by the Board
of Directors of the Company.
15. Governing Law. The Plan shall be governed by the laws of the State
of Delaware.
16. Expenses of Administration. All costs and expenses incurred in the
operation and administration of this Plan shall be borne by the Company.
Fortune/Incentive Stock Option Plan
6
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
STOCK BONUS PLAN
1. Purpose. The purpose of this Plan is to advance the interests of
Fortune Entertainment Corporation (the "Company") and its shareholders, by
encouraging and enabling selected officers, directors, consultants and key
employees upon whose judgment, initiative and effort the Company is largely
dependent for the successful conduct of its business, to acquire and retain a
proprietary interest in the Company by ownership of its stock, to keep personnel
of experience and ability in the employ of the Company and to compensate them
for their contributions to the growth and profits of the Company and thereby
induce them to continue to make such contributions in the future.
2. Definitions.
A. "Board" shall mean the board of directors of the Company.
B. "Committee" means the directors duly appointed to administer the
Plan.
C. "Plan" shall mean this Stock Bonus Plan.
D. "Bonus Share" shall mean the shares of common stock of the
Company reserved pursuant to Section 4 hereof and any such shares issued to a
Recipient pursuant to this Plan.
E. "Recipient" shall mean any individual rendering services for the
Company to whom shares are granted pursuant to this Plan.
3. Administration of Plan. The Plan shall be administered by a
committee of two or more directors appointed by the Board (the "Committee"). The
Committee shall report all action taken by it to the Board. The Committee shall
have full and final authority in its discretion, subject to the provisions of
the Plan, to determine the individuals to whom and the time or times at which
Bonus Shares shall be granted and the number of Bonus Shares; to construe and
interpret the Plan; and to make all other determinations and take all other
actions deemed necessary or advisable for the proper administration of the Plan.
All such actions and determinations shall be conclusively binding for all
purposes and upon all persons.
4. Bonus Share Reserve. There shall be established a Bonus Share
Reserve to which shall be credited 500,000 shares of the Company's common stock.
In the event that the shares of common stock of the Company should, as a result
of a stock split or stock dividend or combination of shares or any other change,
or exchange for other securities by reclassification, reorganization, merger,
consolidation, recapitalization or otherwise, be increased or decreased or
changed into or exchanged for, a different number or kind of shares of stock or
other securities of the Company or of another corporation, the number of shares
then remaining in the Bonus Share Reserve shall be appropriately adjusted to
reflect such action. Upon the grant of shares hereunder, this reserve shall be
reduced by the number of shares so granted. Distributions of Bonus Shares may,
as the Committee shall in its sole discretion determine, be made from authorized
but unissued shares or from treasury shares. All authorized and unissued shares
issued as Bonus Shares in accordance with the Plan shall be fully paid and
nonassessable and free from preemptive rights.
<PAGE>
5. Eligibility, and Granting and Vesting of Bonus Shares. Bonus Shares
may be granted under the Plan to the Company's employees, directors and
officers, and consultants or advisors to the Company, provided however that bona
fide services shall be rendered by such consultants or advisors and such
services must not be in connection with the offer or sale of securities in a
capital-raising transaction.
The Committee, in its sole discretion, is empowered to grant to an
eligible Participant a number of Bonus Shares as it shall determine from time to
time. Each grant of these Bonus Shares shall become vested according to a
schedule to be established by the Committee directors at the time of the grant.
For purposes of this plan, vesting shall mean the period during which the
recipient must remain an employee or provide services for the Company. At such
time as the employment of the Recipient ceases, any shares not fully vested
shall be forfeited by the Recipient and shall be returned to the Bonus Share
Reserve. The Committee, in its sole discretion, may also impose restrictions on
the future transferability of the bonus shares, which restrictions shall be set
forth on the notification to the Recipient of the grant.
The aggregate number of Bonus Shares which may be granted pursuant
to this Plan shall not exceed the amount available therefore in the Bonus Share
Reserve.
6. Form of Grants. Each grant will specify the number of Bonus Shares
subject thereto, subject to the provisions of Section 5 hereof.
At the time of making any grant, the Committee shall advise the
Recipient by delivery of written notice, in the form of Exhibit A hereto
annexed.
7. Recipients' Representations.
A. The Committee may require that, in acquiring any Bonus Shares,
the Recipient agree with, and represent to, the Company that the Recipient is
acquiring such Bonus Shares for the purpose of investment and with no present
intention to transfer, sell or otherwise dispose of shares except such
distribution by a legal representative as shall be required by will or the laws
of any jurisdiction in winding-up the estate of any Recipient. Such shares shall
be transferable thereafter only if the proposed transfer shall be permissible
pursuant to the Plan and if, in the opinion of counsel (who shall be
satisfactory to the Committee), such transfer shall at such time be in
compliance with applicable securities laws.
2
<PAGE>
B. To effectuate Paragraph A above, the Recipient shall deliver to
the Committee, in duplicate, an agreement in writing, signed by the Recipient,
in form and substance as set forth in Exhibit B hereto annexed, and the
Committee shall forthwith acknowledge its receipt thereof.
8. Restrictions Upon Issuance.
A. Bonus Shares shall forthwith after the making of any
representations required by Section 6 hereof, or if no representations are
required then within thirty (30) days of the date of grant, be duly issued and
transferred and a certificate or certificates for such shares shall be issued in
the Recipient's name. The Recipient shall thereupon be a shareholder with
respect to all the shares represented by such certificate or certificates, shall
have all the rights of a shareholder with respect to all such shares, including
the right to vote such shares and to receive all dividends and other
distributions (subject to the provisions of Section 7(B) hereof) paid with
respect to such shares. Certificates of stock representing Bonus Shares shall be
imprinted with a legend to the effect that the shares represented thereby are
subject to the provisions of this Agreement, and to the vesting and transfer
limitations established by the Committee, and each transfer agent for the common
stock shall be instructed to like effect with respect of such shares.
B. In the event that, as the result of a stock split or stock
dividend or combination of shares or any other change, or exchange for other
securities, by reclassification, reorganization, merger, consolidation,
recapitalization or otherwise, the Recipient shall, as owner of the Bonus Shares
subject to restrictions hereunder, be entitled to new or additional or different
shares of stock or securities, the certificate or certificates for, or other
evidences of, such new or additional or different shares or securities, together
with a stock power or other instrument of transfer appropriately endorsed, shall
also be imprinted with a legend as provided in Section 7(A), and all provisions
of the Plan relating to restrictions herein set forth shall thereupon be
applicable to such new or additional or different shares or securities to the
extent applicable to the shares with respect to which they were distributed.
C. The grant of any Bonus Shares shall be subject to the condition
that if at any time the Company shall determine in its discretion that the
satisfaction of withholding tax or other withholding liabilities, or that the
listing, registration, or qualification of any Bonus Shares upon such exercise
upon any securities exchange or under any state or federal law, or that the
consent or approval of any regulatory body, is necessary or desirable as a
condition of, or in connection with, the issuance of any Bonus Shares, then in
any such event, such exercise shall not be effective unless such withholding,
listing, registration, qualification, consent, or approval shall have been
effected or obtained free of any conditions not acceptable to the Company.
3
<PAGE>
D. Unless the Bonus Shares covered by the Plan have been registered
with the Securities and Exchange Commission pursuant to Section 5 of the
Securities Act of 1933, each Recipient shall, by accepting a Bonus Share,
represent and agree, for himself and his transferees by will or the laws of
descent and distribution, that all Bonus Shares were acquired for investment and
not for resale or distribution. Upon such exercise of any portion of an option,
the person entitled to exercise the same shall, upon request of the Committee,
furnish evidence satisfactory to the Committee (including a written and signed
representation) to the effect that the shares of stock are being acquired in
good faith for investment and not for resale or distribution. Furthermore, the
Committee may, if it deems appropriate, affix a legend to certificates
representing Bonus Shares indicating that such Bonus Shares have not been
registered with the Securities and Exchange Commission and may so notify the
Company's transfer agent. Such shares may be disposed of by a Recipient in the
following manner only: (1) pursuant to an effective registration statement
covering such resale or reoffer, (2) pursuant to an applicable exemption from
registration as indicated in a written opinion of counsel acceptable to the
Company, or (3) in a transaction that meets all the requirements of Rule 144 of
the Securities and Exchange Commission. If Bonus Shares covered by the Plan have
been registered with the Securities and Exchange Commission, no such
restrictions on resale shall apply, except in the case of Recipients who are
directors, officers, or principal shareholders of the Company. Such persons may
dispose of shares only by one of the three aforesaid methods.
9. Limitations. Neither the action of the Company in establishing the
Plan, nor any action taken by it nor by the Committee under the Plan, nor any
provision of the Plan, shall be construed as giving to any person the right to
be retained in the employ of the Company.
Every right of action by or on behalf of the Company or by any
shareholder against any past, present or future member of the Board, or any
officer or employee of the Company arising out of or in connection with this
Plan shall, irrespective of the place where action may be brought and
irrespective of the place of residence of any such director, officer or employee
cease and be barred by the expiration of one year from whichever is the later of
(a) the date of the act or omission in respect of which such right of action
arises; or (b) the first date upon which there has been made generally available
to shareholders an annual report of the Company or any proxy statement for the
annual meeting of shareholders following the issuance of such annual report,
which annual report and proxy statement alone or together set forth, for the
related period, the number of shares issued pursuant to this Plan; and any and
all right of action by any employee (past, present or future) against the
Company arising out of or in connection with this Plan shall, irrespective of
the place where action may be brought, cease and be barred by the expiration of
one year from the date of the act or omission in respect of which such right of
action arises.
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<PAGE>
10. Amendment, Suspension or Termination of the Plan. The Board of
Directors may alter, suspend, or discontinue the Plan, but may not, without the
approval of a majority of those holders of the Company's Common Stock voting in
person or by proxy at any meeting of the Company's shareholders, make any
alteration or amendment thereof which operates to (a) abolish the Committee,
change the qualification of its members, or withdraw the administration of the
Plan from its supervision, (b) make any material change in the class of eligible
employees as defined in paragraph 5, (c) increase the total number of shares
reserved for purposes of this Plan except as provided in paragraph 4, (d) extend
the term of the Plan or, (e) materially increase the benefits accruing to
persons participating under this Plan.
Unless the Plan shall theretofore have been terminated by the
Board, the Plan shall terminate ten years after the effective date of the Plan.
No Bonus Share may be granted during any suspension or after the termination of
the Plan. No amendment, suspension, or termination of the Plan shall, without a
recipients consent, alter or impair any of the rights or obligations under any
Bonus Share theretofore granted to such recipient under the Plan.
11. Governing Law. The Plan shall be governed by the laws of the State
of Delaware.
12. Expenses of Administration. All costs and expenses incurred in the
operation and administration of this Plan shall be borne by the Company.
5
<PAGE>
-EXHIBIT A-
FORTUNE ENTERTAINMENT CORPORATION
STOCK BONUS PLAN
================================================================================
TO: Recipient:
PLEASE BE ADVISED that Fortune Entertainment Corporation has on the date
hereof granted to the Recipient the number of Bonus Shares as set forth under
and pursuant to the Stock Bonus Plan. Before these shares are to be issued, the
Recipient must deliver to the Committee that administers the Stock Bonus Plan
an agreement in duplicate, in the form as Exhibit B hereto. The Bonus Shares
are issued subject to the following vesting and transfer limitation.
Vesting:
Number of Shares Date of Vesting
Transfer Limitations:
FORTUNE ENTERTAINMENT CORPORATION
_____________________________ By ______________________________
Date
6
<PAGE>
-EXHIBIT B-
================================================================================
Fortune Entertainment Corporation
303-543 Granville Street
Vancouver, B.C.
Canada V6C 1X8
Gentlemen:
I represent and agree that said Bonus Shares are being acquired by me for
investment and that I have no present intention to transfer, sell or otherwise
dispose of such shares, except as permitted pursuant to the Plan and in
compliance with applicable securities laws, and agree further that said shares
are being acquired by me in accordance with and subject to the terms, provisions
and conditions of said Plan, to all of which I hereby expressly assent. These
agreements shall bind and inure to the benefit of my heirs, legal
representatives, successors and assigns.
My address of record is:
and my social security number:
Very truly yours,
Receipt of the above is hereby acknowledged.
FORTUNE ENTERTAINMENT CORPORATION
_____________________________ By ______________________________
Date its _____________________________
Fortune/Stock Bonus Plan
7
