As filed with the Securities and Exchange Commission on ___________ , 2000.
Registration No. 333-
-----
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
Registration Statement
Under
THE SECURITIES ACT OF 1933
FORTUNE ENTERTAINMENT CORPORATION.
--------------------------------------------
(Exact name of registrant as specified in charter)
Colorado 88-0405437
-------------------------- -------------------- --------------
(State or other jurisdiction (Primary Standard Classi- (IRS Employer
of incorporation) fication Code Number) I.D. Number)
333 Orville Wright Court.
Las Vegas, Nevada 89119
(702) 614-6124
-------------------------
(Address and telephone number
of principal executive offices)
Douglas R. Sanderson
333 Orville Wright Court.
Las Vegas, Nevada 89119
(702) 614-6124
--------------------------
(Name, address and telephone number of agent for service)
Copies of all communications, including all communications sent
to the agent for service, should be sent to:
William T. Hart, Esq.
Hart & Trinen
1624 Washington Street
Denver, Colorado 80203
(303) 839-0061
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date
of this Registration Statement
Page 1 of Pages
Exhibit Index Begins on Page
<PAGE>
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number
of the earlier effective registration statement for the same offering.
[ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
-------------------------------------------------------------------------------
Title of each Proposed Proposed
Class of Maximum Maximum
Securities Securities Offering Aggregate Amount of
to be to be Price Per Offering Registration
Registered Registered (1) Unit (2) Price Fee
---------- -------------- -------- --------- --------------
Common stock 10,589,890 $0.40 $4,235,956 $1,119
(1) Shares are offered by certain selling shareholders
(2) Offering price computed in accordance with Rule 457 (c).
The registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of l933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
PROSPECTUS
FORTUNE ENTERTAINMENT CORPORATION
Common Stock
This prospectus relates to the sale of 10,589,890 shares of the common
stock of Fortune Entertainment Corporation by certain owners of shares of
Fortune's common stock. The shares were issued by Fortune for cash, services
rendered and in settlement of amounts owed by Fortune to various third parties.
The owners of the common stock to be sold by means of this prospectus
are referred to as the "selling shareholders".
These securities are speculative and involve a high degree of risk and
should be purchased only by persons who can afford to lose their entire
investment. For a description of certain important factors that should be
considered by prospective investors, see "Risk Factors" beginning on page of
this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
Fortune's common stock is traded on the Over-The-Counter Bulletin Board. On
August 1, 2000 the closing price for Fortune's common stock was $0.40.
The date of this prospectus is , 2000
<PAGE>
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY ...................................................
RISK FACTORS .........................................................
COMPARATIVE SHARE DATA ...............................................
MARKET FOR FORTUNE'S COMMON STOCK.....................................
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS...........................................................
BUSINESS .............................................................
MANAGEMENT ...........................................................
PRINCIPAL SHAREHOLDERS ...............................................
SELLING SHAREHOLDERS .................................................
DESCRIPTION OF SECURITIES ............................................
EXPERTS ..............................................................
LITIGATION ...........................................................
INDEMNIFICATION ......................................................
ADDITIONAL INFORMATION ...............................................
FINANCIAL STATEMENTS .................................................
<PAGE>
PROSPECTUS SUMMARY
BUSINESS
As of June 30, 2000 Fortune owned the rights to three casino games.
Fortune Poker. The Fortune Poker system is an interactive, progressive,
tournament video terminal poker game which allows the player to play against a
single machine or against other players on similar terminals at the same
location or remote locations. The progressive configuration generally links
separate games through a computer network which allows players to share a common
jackpot which is usually much larger than the jackpot that a single, unlinked
machine could support. Progressive jackpots can reach several million dollars.
Progressive games may be linked locally within a bank of a few machines, across
an entire casino, or across an entire state.
Electronic Bingo. Fortune has developed a interactive, progressive, tournament
style Electronic Bingo game which allows the player to play against a single
machine or against other players on similar terminals at the same location or
remote locations. As with Fortune's Fortune Poker game, Fortune's Electronic
Bingo game allows for a progressive configuration thereby allowing players to
share a common jackpot which is usually much larger than the jackpot capable of
being supported by a single machine.
Rainbow 21 Blackjack Game. Rainbow 21 is a simple variation to the conventional
game of Blackjack or 21. Rainbow 21 is played in the same was as the game of
Blackjack and on a standard blackjack table but 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. As a result, the game provides for a possible thirty-six
decisions per round versus the standard seven decisions per round (each of the
six players can make up to six wagers, i.e. one wager on their hand and one
wager on each of the other five players' hand).
Plan of Operation.
-----------------
During the period ending December 31, 2000 Fortune plans to market its
Fortune Poker and electronic Bingo games to Indian Tribes holding Class III
casino licenses in Minnesota. During the year 2000 Fortune plans to license the
rights to its Rainbow 21 game to third parties who will then attempt to market
the Rainbow 21 game to casino operators.
RISK FACTORS
There are substantial risks associated with an investment in Fortune's
common stock including, among others, Fortune's need for additional capital.
Fortune's products are in the early stage of commercialization and regulatory
approval. Fortune has not, to date, generated any revenues from its operations.
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following sets forth certain financial data with respect to Fortune
and is qualified in its entirety by reference to the more detailed financial
statements and notes included elsewhere in this prospectus.
Statement of Operations Data:
----------------------------
Three Months
Year Ended Ended March
December 31, 1999 31, 2000
------------------ ------------
Revenues $ -- $ --
General and Administrative
Expenses (1,994,641) (407,104)
Other Income (Expense) 1,314 --
-------- -------
Net (Loss) $(1,993,327) $(407,104)
============ ==========
Balance Sheet Data:
------------------
December 31, 1999 March 31, 2000
----------------- --------------
Current Assets $25,032 $208,738
Total Assets 6,876,140 7,486,589
Current Liabilities 2,232,625 2,095,326
Total Liabilities 2,232,625 2,095,326
Working Capital (Deficit) (2,207,593) (1,886,588)
Shareholders' Equity (Deficit) 4,643,515 5,391,263
<PAGE>
RISK FACTORS
In addition to other information contained elsewhere in this prospectus,
potential investors should consider carefully the following risk factors.
Limited Relevant Operating History; Historical Losses
Fortune has engaged only in the acquisition and development of gaming
products, principally the Fortune Poker System and the Rainbow 21 blackjack
game, but has not as yet sold any product or derived any revenue. To date,
Fortune's only source of funds for its activities has been proceeds from the
sale of securities. Consequently, Fortune has no relevant operating history upon
which an evaluation of its prospects can be made. Such prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered in connection with the operation and expansion of a new business and
commercialization of new products, particularly those associated with the
rapidly evolving and highly regulated gaming industry, which is characterized by
an increasing number of market entrants, intense competition and substantial
capital requirements. In addition, Fortune has experienced significant losses
since its inception in August 1997, due primarily to overhead and other costs
incurred in the development and acquisition of products. Moreover, Fortune
expects to incur substantial up-front expenditures and operating costs in
connection with the expansion of its marketing efforts and product lines, which
are expected to result in additional losses. There can be no assurance that
Fortune will be able to successfully implement its business strategies, that it
will achieve revenues or that it will ever be able to achieve or sustain
profitable operations.
Significant Capital Requirements; Negative Cash Flow; Possible Need for
Additional Financing
Fortune's capital requirements have been and will continue to be
significant, and, to date Fortune has not realized any revenues from operations.
Since inception, Fortune's only source of funds has been proceeds from the sale
of its securities. Fortune has been dependent on private financings and the
issuance of its equity securities to fund all of its capital and operating
requirements. As a result, Fortune is dependent upon raising additional capital
to complete the development of its currently proposed products and fund its
business strategies. Fortune has no current arrangements with respect to, or
potential sources of, any additional financing, and it is not anticipated that
existing shareholders will provide any portion of Fortune's future financing
requirements. Consequently, there can be no assurance that any additional
financing will be available to Fortune when needed, on commercially reasonable
terms, or at all. Any inability to obtain additional financing when needed would
require Fortune to delay or scale back its product development and marketing
programs, which could have a material adverse effect on Fortune. In addition,
any additional equity financing may involve substantial dilution to the
interests of Fortune's then existing shareholders.
Dependence On a Limited Number of Products
To date, Fortune has focused it efforts principally on the
commercialization of two products -- the Fortune Poker System and the Rainbow 21
blackjack game. Due to this concentration on a limited number of products,
Fortune may be adversely affected if one or more of its principal products fails
to achieve anticipated results. Fortune has not realized any revenue as of yet
from the sale of either of these products. There can be no assurance that
<PAGE>
Fortune will not remain dependent upon a limited number of products for a
substantial portion of its revenues or that any products introduced by Fortune
will be commercially viable. Failure to continuously acquire and develop and
introduce new, commercially successful products would have a material adverse
effect on Fortune.
Competition
The gaming machine industry is intensely and increasingly competitive.
Industry competition is based primarily upon product quality and features, the
access to distribution channels, marketing effectiveness, reliability and ease
of use, price and the quality of customer support services. Many of the
companies with which Fortune expects to compete or may compete against have
greater financial, technical, marketing, sales and customer support and other
resources than Fortune and have established reputations for success in the
development, licensing and sale of their products and technology. Current and
future competitors with greater financial resources than Fortune may be able to
carry larger inventories, undertake more extensive marketing campaigns, adopt
more aggressive pricing policies and make higher offers or guarantees to third
party developers and licensors than Fortune. As competition increases, even if
Fortune achieves successful commercialization of its initial products,
significant price competition, increased production costs and reduced profit
margins may result. There can be no assurance that Fortune will be able to
compete successfully against current or future competitors or that competitive
pressures faced by Fortune will not have a material adverse effect on its future
operations.
Government Regulation
Fortune's operations are subject to state and local gaming laws as well as
various federal laws and regulations governing business activities with Native
American tribes. The state and local laws in the United States which govern the
lease and use of gaming products are widely disparate and continually changing
due to legislative and administrative actions and judicial interpretations. If
any changes occur in gaming laws through statutory enactment or amendment,
judicial decision or administrative action restricting the manufacture,
distribution or use of some or all of Fortune's products, Fortune's present and
proposed business could be adversely affected.
The operation of gaming on Native American reservations is subject to the
Indian Gaming Regulations Act ("IGRA"). Under IGRA, certain types of gaming
activities are classified as Class I, Class II or Class III. Fortune's business
will be impacted, based upon how its products are ultimately classified.
Fortune is not licensed as a game manufacturer by, nor is its Fortune
Poker system licensed for sale as a gaming machine in, Nevada, New Jersey or any
other state regulatory jurisdiction. Fortune intends to make application for
such licenses, but there can be no assurance when, if ever, such licenses will
be granted. The inability of Fortune to obtain applicable state licenses,
particularly in Nevada and New Jersey, could have a material adverse effect upon
Fortune.
<PAGE>
Concentration of Ownership
Fortune's executive officers, directors and affiliated entities and
persons own beneficially a substantial portion of the outstanding shares of
common stock. Accordingly, such persons and entities will be in position to
influence the election of Fortune's directors and the outcome of corporate
actions requiring shareholder approval. The concentration of ownership may have
the effect of delaying or preventing a change in control of Fortune.
Sporadic Market for the Common Stock; Possible Volatility of Stock Price; Risk
of Delisting from Over the Counter Bulletin Board.
Trading in the shares of Fortune's common stock has been sporadic, and
there can be no assurance that an active and liquid trading market will develop
or be sustained. The market price of Fortune's common stock could therefore be
subject to wide fluctuations in response to variations in quarterly operating
results and other factors, such as announcements of new products by Fortune or
its competitors and failures to meet or exceed the expectations of securities
analysts or investors or other events.
Risk of Low Priced Stocks
Rules 15g-1 through 15g-9 promulgated under the Securities Exchange Act of
1934 impose sales practice and disclosure requirements on certain brokers and
dealers who engage in certain transactions involving "a penny stock."
Currently, Fortune's common stock is considered penny stock for purposes
of the Exchange Act. The additional sales practice and disclosure requirements
imposed on certain brokers and dealers could impede the sale of Fortune's common
stock, including securities purchased in any offering by Fortune or in the
secondary market. In addition, the market liquidity for Fortune's securities may
be severely adversely affected, with concomitant adverse effects on the price of
Fortune's securities.
Under the penny stock regulations, a broker or dealer selling penny stock
to anyone other than an established customer or "accredited investor" (generally
an individual with net worth in excess of $1,000,000 or annual incomes exceeding
$200,000 or $300,000 together with his or her spouse) must make a special
suitability determination for the purchaser and must receive the purchaser's
written consent to the transaction prior to sale, unless the broker or dealer or
the transaction is otherwise exempt. In addition, the penny stock regulations
require the broker or dealer to deliver, prior to any transaction involving a
penny stock, a disclosure schedule prepared by the Securities and Exchange
commission relating to the penny stock market, unless the broker or dealer or
the transaction is otherwise exempt. A broker or dealer is also required to
disclose commissions payable to the broker or dealer and the registered
representative and current quotations for the securities. In addition, a broker
or dealer is required to send monthly statements disclosing recent price
information with respect to the penny stock held in a customer's account and
information with respect to the limited market in penny stocks.
Lack of Trademark and Patent Protection
Fortune relies on a combination of patent, trade secret, copyright and
trademark law, non-disclosure agreements, and technical security measures to
protect its products. Notwithstanding these safeguards, it is possible for
<PAGE>
competitors of Fortune 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 Fortune. While Fortune may obtain patents with
respect to certain of its products, Fortune 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.
Shares Eligible for Future Sale; Registration Rights
Sales of substantial amounts of Fortune's common stock in the public
market could adversely affect prevailing market prices for the common stock. No
prediction can be made as to the effect, if any, that sales of such freely
tradable or registrable securities or the availability of such securities for
sale will have on the market prices prevailing from time to time. The
possibility that a substantial number of Fortune's securities may be sold in the
public market may adversely affect prevailing market prices for the common stock
and could impair Fortune's ability to raise capital through the sale of its
equity securities.
Contingent Payments Under Acquisition Agreement
Under the agreement to acquire the Rainbow 21 blackjack game, Fortune has
undertaken to issue additional shares or make cash payments with respect to the
500,000 shares issued in the Rainbow 21 acquisition, if the trading price for
the shares during a 5 trading day period specified in the agreement is less than
$2.00 per share.
The possible issuance of a large number of shares of common stock pursuant
to the Rainbow 21 agreement described in the preceding paragraph and the
possible availability of a large number of shares of stock for sale could have
an adverse effect on market prices prevailing from time to time for the common
stock and may impair Fortune's ability to raise capital through the sale of
equity securities.
Forward-Looking Information May Prove Inaccurate
This prospectus contains various forward-looking statements that are based
on Fortune's beliefs as well as assumptions made by and information currently
available to Fortune. When used in this registration statement, the words
"believe," "expect," "anticipate," "estimate" and similar expressions are
intended to identify forward-looking statements. The accuracy of such
forward-looking statements is subject to certain risks, uncertainties and
assumptions, including those identified above under "Risk Factors." Should one
or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated, or projected. Fortune cautions potential purchasers not
to place undue reliance on any such forward-looking statements.
COMPARATIVE SHARE DATA
As of June 30, 2000 Fortune had 25,829,280 outstanding shares of common
stock which had a net tangible book value (on a pro forma basis) of
approximately $0.18 per share.
<PAGE>
Number of Shares
Shares outstanding as of June 30, 2000 (1) 25,829,280
Shares offered by selling shareholders 10,589,890
Percentage of Fortune's common stock represented
by shares offered by this prospectus 41%
Net tangible book value per share (on a pro forma
basis) as of June 30, 2000. $0.18
The purchasers of the securities offered by this prospectus will suffer
an immediate dilution if the price paid for the securities offered is greater
than the net tangible book value of Fortune's common stock.
"Net tangible book value" is the amount that results from subtracting
the total liabilities and intangible assets of Fortune from its total assets.
As of June 30, 2000 Fortune had 25,829,280 shares of common stock
issued and outstanding. The following table reflects the shares of common stock
which may be issued as the result of agreements between Fortune and third
parties and the exercise of options and warrants issued by Fortune.
Number of Note
Shares Reference
Shares Outstanding 25,829,280
Shares issuable upon exercise of options 1,950,000 A
Shares issuable upon exercise of warrants 3,143,333 B
Shares issuable to Team Rainbow Unknown C
A. Options may be exercised at a prices between $0.20 and $0.90 per share and
expire at various dates prior to April 30, 2010. All options are currently
exercisable.
B. Warrants are exercisable at prices between $0.50 and $0.85 per share and
expire between July 2000 and April 2003.
C. See "Business" for information concerning the additional shares which may
be issued to Team Rainbow.
MARKET FOR FORTUNE'S COMMON STOCK
Fortune's common stock is quoted on the Over-the-Counter Bulletin Board
under the symbol "FETG". The following table presents the high and low closing
<PAGE>
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 Prices
Quarter ending Low High
June 30, 1998 $ 0.53 $ 2.00
September 30, 1998 $ 0.88 $ 1.97
December 31, 1998 $ 0.41 $ 0.78
March 31, 1999 $ 0.47 $ 1.15
June 30, 1999 $ 0.41 $ 0.94
September 30, 1999 $ 0.45 $ 0.80
December 31, 1999 $ 0.29 $ 0.75
March 31, 2000 $0.85 $0.86
Fortune has approximately 350 record holders of its common stock.
Fortune has never declared or paid any cash dividends and Fortune does
not anticipate paying any dividends in the foreseeable future.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following sets forth certain financial data with respect to Fortune and
is qualified in its entirety by reference to the more detailed financial
statements and notes included elsewhere in this report.
Statement of Operations Data:
----------------------------
Three Months
Year Ended Ended March
December 31, 1999 31, 2000
------------------ ------------
Revenues $ -- $ --
General and Administrative
Expenses (1,994,641) (407,104)
Other Income (Expense) 1,314 --
-------- -------
Net (Loss) $(1,993,327) $(407,104)
============ ==========
<PAGE>
Balance Sheet Data:
------------------
December 31, 1999 March 31, 2000
----------------- --------------
Current Assets $25,032 $208,738
Total Assets 6,876,140 7,486,589
Current Liabilities 2,232,625 2,095,326
Total Liabilities 2,232,625 2,095,326
Working Capital (Deficit) (2,207,593) (1,886,588)
Shareholders' Equity (Deficit) 4,643,515 5,391,263
Fortune has not, to date, generated any revenues from its operations.
Accordingly, Fortune has since inception funded its operations and capital
expenditures primarily through private placements of debt and equity securities.
During the year ended December 31, 1999 Fortune's sources and use of cash
were:
Cash used in operations $(1,377,686)
Proceeds from sale of common stock 1,222,936
Amounts borrowed from third parties
(net of repayments) 376,511
Purchase of stock in Sega Gaming
Technology, Inc. (172,907)
Payments to Danton Group as partial
consideration for capital stock of PVA (300,000)
Payments to Team Rainbow, Inc. as
partial consideration for assignment of
rights to Rainbow 21 Blackjack game (80,000)
During the three months ended March 31, 2000 Fortunes's sources and use of
cash were:
Cash used in operations $(267,979)
Proceeds from sale of common stock 554,852
Repayment of loans (100,532)
During the twelve months ending December 31, 2000 Fortune anticipates that
it will need capital for the following purposes:
Fund operating losses: $970,000
Completion of testing of Fortune Poker game 100,000
by Gaming Laboratories International
<PAGE>
Payments to Danton Group as Final payment 405,000
for capital stock of PVA
Accrued salary owed to William Danton 150,000
Accrued salary owed to Roland Thomas 65,000
Accrued salary owed to Theodore Silvester, Jr. 65,000
Payment of accounts payable 1,500,000
Potential acquisition of business involved
in the manufacture and distribution of video
gaming machines 800,000
------------
$4,055,000
Fortune has signed a letter of intent to acquire a corporation
affiliated with Roland Thomas, an officer and director of Fortune. The
corporation affiliated with Mr. Thomas has an agreement to acquire the assets of
an unrelated corporation which is involved in the manufacture and distribution
of video gaming machines. There is no assurance that Fortune will proceed with
this acquisition.
As of June 30, 2000 Fortune had approximately $750,000 in cash. Fortune
anticipates obtaining the additional capital which it will require through a
combination of debt and equity financing. There is no assurance that Fortune
will be able to obtain the capital it will need or that Fortune's estimates of
its capital requirements will prove to be accurate. As of May 31, 2000 Fortune
did not have any commitments from any source to provide additional capital.
Fortune's products are in the early stage of commercialization and
regulatory approval. The ability of Fortune to generate revenues and positive
cash flow will depend on several factors, including the timing and costs in
obtaining gaming licenses and concluding agreements with Indian Tribal Casinos
with respect to Fortune's gaming products.
See Business" for information concerning Fortune's plan of operations
during the year ending December 31, 2000.
BUSINESS
Fortune was incorporated in Delaware on August 25, 1997 to engage in the
acquisition, design and development of select gaming products which Fortune
intends sell to United States and international gaming markets.
In September 1997 FET, Inc. (a Colorado Corporation) was merged into
Fortune. In connection with this merger, Fortune issued 2,175,456 shares of its
common stock to the former shareholders of FET, Inc. At the time of this merger
FET was not conducting any business.
<PAGE>
In October 1997 Fortune acquired all of the issued and outstanding shares
of Fortune Entertainment Corporation, a corporation organized under the laws of
the Bahamas ("Fortune/Bahamas") for 1,090,464 shares of common stock, 1,090,464
shares of Series A Preferred Stock, 1,090,464 shares of Series B Preferred
Stock, 1,090,464 shares of Series C Preferred Stock. Each share of Fortune's
Preferred Stock is, at the option of the holder, convertible into one share of
Fortune'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.
Fortune/Bahamas was incorporated in the Bahamas on April 2, 1996. At the
time of its acquisition by Fortune, Fortune/Bahamas had certain agreements with
Professional Video Association, Inc. ("PVA") relating to the acquisition of
Fortune's Fortune Poker game and an electronic bingo game.
Unless otherwise indicated, all references to Fortune include FET, Inc. and
Fortune/Bahamas.
Fortune is in the early stages of marketing its products and has not
earned any revenues.
Fortune Poker
In 1998 Fortune acquired from Video Lottery Consultants and William M.
Danton (the "Danton Group") all of the capital stock of PVA. The Fortune Poker
game is based upon technology covered by United States Patent No. 4,648,604
expiring in 2004 (the "Patent"), copyrighted game rules, and proprietary
software. As part of the agreement relating to the acquisition of PVA the Danton
Group assigned to Fortune all of the Danton Group's rights and obligations
pursuant to a Manufacturing Agreement and a related Software Release Agreement.
The Fortune Poker system is an interactive, progressive, tournament video
terminal poker game which allows the player to play against a single machine or
against other players on similar terminals at the same location or remote
locations.
The progressive configuration generally links separate games through a
computer network which allows players to share a common jackpot which is usually
much larger than the jackpot that a single, unlinked machine could support.
Progressive jackpots can reach several million dollars. Progressive games may be
linked locally within a bank of a few machines, across an entire casino, or
across an entire state.
By allowing progressive play against many other players the Fortune Poker
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.
Fortune intends, initially, to lease its Fortune Poker system to the
Indian Gaming segment of the market under revenue sharing arrangements with the
operators of gaming establishments. Under Fortune'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 if their popularity builds, the operator can add units to the system
without abandoning its investment in existing units.
<PAGE>
In consideration of the transfer of the stock in PVA and the assignment of
the Manufacturing Agreement and the Software Release Agreement, Fortune issued
1,647,500 shares of common stock to the Danton Group and paid the Danton Group
$1,006,986 in cash. Fortune also issued 200,000 shares of common stock to an
unrelated third party as a finder's fee in connection with the transaction.
In connection with this transaction, Fortune agreed to issue additional
shares to the Danton Group, or make payments to the Danton Group, if during the
60 day period ending on July 23, 1999 the shares of Fortune's common stock did
not have a closing bid price at least $2.00 per share. If Fortune's stock price
did not meet this requirement Fortune was required to pay the Danton Group (for
each share of Fortune's common stock still held by the Danton Group), the
difference between (i) $2.00 and (ii) the greater of $0.50 or the average
closing bid price of the shares of Fortune's common stock for the ten days
preceding August 7, 1999 (the "Average Price"). Fortune could pay this
difference in cash or, at Fortune's option, in shares of Fortune's common stock.
Since the bid price of Fortune's common stock was less than $2.00 per share
during the period prior to August 7, 1999, and in accordance with the formula
specified above, Fortune issued 4,500,000 additional shares of common stock to
the Danton Group in June 30, 2000.
As part of its agreement with the Danton Group, Fortune also:
A. Paid the Danton Group an additional $405,000 in cash on June 8, 2000;
B. Issued an additional 200,000 shares of common stock to the Danton Group;
C. Agreed to pay the Danton Group 20% of all up-front licensing fees paid or
payable to Fortune with respect to the Fortune Poker game; and
D. Until the expiration of the Patent, or any renewals or extensions of the
Patent, agreed to issue additional shares of its common stock to the Danton
Group in an amount determined by the following formula:
Net earnings x Percentage
Average Share Price
Percentage is 4% in 2000, 5% in 2001 and 10% in 2002 and thereafter
provided that the Percentage will automatically increase to 10% if
Net Earnings are at least $10,000,000.
Net Earnings means Fortune's earnings during each twelve month
period ending December 31 from the revenues derived from the Fortune
Poker game before income tax, depreciation and amortization.
Average Share Price means the average trading price of Fortune's
common stock for the last 30 trading days of Fortune's fiscal year.
The shares of common stock issued to the Danton Group are being registered
for public sale by means of this prospectus. See "Selling Shareholders".
Each Fortune Poker video terminal includes the software necessary for it's
internal operation. A separate software system (the "Central System Software")
allows the terminals to interact through telephone lines and permits a player at
a PVA terminal to play poker with players at other terminals.
<PAGE>
The Manufacturing Agreement provides Amusement World, Inc. with the
exclusive right to manufacture Fortune Poker terminals for Fortune until April
23, 2007. The cost to Fortune for each terminal will range from $2,700 to $3,600
depending upon the type of terminal ordered by Fortune. The cost of the
terminals will increase based upon increases in the Consumer Price Index. The
Manufacturing Agreement provides that a minimum of 333 terminals are required to
be purchased from Amusement World during each of the twelve month periods ending
April 23, 1998, 1999 and 2000. Although as of June 30, 2000 less than twenty
terminals had been purchased, Amusement World has waived the minimum purchase
requirement.
Electronic Bingo
Fortune has developed a interactive, progressive, tournament style
Electronic Bingo game which allows the player to play against a single machine
or against other players on similar terminals at the same location or remote
locations.
As with Fortune's Fortune Poker game, Fortune's Electronic Bingo game
allows for a progressive configuration thereby allowing players to share a
common jackpot which is usually much larger than the jackpot capable of being
supported by a single machine.
Rainbow 21 Blackjack Game
In 1998 Fortune acquired from Team Rainbow Inc. ("TRI") the rights a
computer-based blackjack game known as Rainbow 21. The Rainbow 21 game is based
upon technology covered by copyrighted game rules, proprietary software and
United States Patent No. 5,390,934 expiring April 11, 2003, and United States
Patent No. 5,494,296 expiring February 5, 2015 (the "Patents").
Rainbow 21 is a simple variation to the conventional game of Blackjack or
21. Rainbow 21 is played in the same was as the game of Blackjack and on a
standard blackjack table but 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.
As a result, the game provides for a possible thirty-six decisions per round
versus the standard seven decisions per round (each of the six players can make
up to six wagers, i.e. one wager on their hand and one wager on each of the
other five players' hand).
Fortune 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.
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. Fortune has been advised by the
Nevada Gaming Control Board that Fortune can sell or lease the Rainbow 21 game
to licensed operators in Nevada without obtaining its own operator's license
provided Fortune does not share in a percentage of the gaming revenues.
<PAGE>
In consideration for the transfer of the assets relating to the Rainbow 21
Game Fortune paid TRI $102,500 and issued TRI 750,000 shares of its common
stock. Fortune's agreement with TRI provides that, if during the last five
trading days in August 2000, the simple average closing price for Fortune's
common stock ("Market Price") does not equal or exceed $2.00 per share, Fortune
would be required to:
1. pay TRI the difference between (i) $1,000,000 and (ii) 500,000 multiplied
by the Market Price (the "Difference"); or
2. deliver to TRI additional shares of common stock in an amount determined by
dividing the Difference by the Market Price.
Sega Gaming Technology Inc.
As of March 31, 2000 Fortune owned 188,886 shares of the common stock of
Sega Gaming Technology, Inc. (SGTI), a Nevada Corporation. These shares were
acquired for $1,090,000 in cash for 375,887 shares of Fortune's common stock.
SGTI was incorporated in 1995 and through a licensing agreement with SEGA of
Japan (SEGA), has the exclusive rights to market certain multi-player gaming
machines of SOJ in various areas of the world.
In May 2000 Fortune sold its interest in SGTI to Sega Enterprises, Ltd. for
$1,511,088 in cash.
Government Regulation
Fortune'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 Fortune's products, Fortune's
present and proposed business could be adversely affected. Notwithstanding the
above, Fortune's initial focus will be on Indian Tribal Casinos which are
regulated under the Indian Gaming Regulatory Act of 1988 ("IGRA").
The IGRA 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 strictures
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
<PAGE>
(i) banked card games including Baccarat, Chemin de fer, Blackjack,
and certain categories of non-banked card games and (ii) electronic
facsimiles of games of chance or slot machines. 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.
(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. Class III gaming
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.
The National Indian Gaming Commission has declined to issue to Fortune an
advisory opinion that its Fortune Poker system gaming machine should be
classified as a Class II activity. Although prior approval is not required under
IGRA for Class II gaming, most Tribes, as a practical matter, are reluctant to
make the investment in a Class II game without an advisory opinion.
Although Class III gaming is highly regulated, the scheme of regulation is
well-defined and tends to involve similar standards from state to state. As a
result, Fortune plans to market its Fortune Poker and electronic Bingo games to
Indian Tribal Casinos having Class III gaming licenses.
All states which permit Class III gaming in Indian Tribal casinos require
mechanical or electronic games to be tested prior to their use. Testing is
required to insure that the game will comply with state regulations. Gaming
commissions in Nevada, New Jersey and several other states have their own
testing laboratories which test mechanical and electronic games. Other states
require these games to be tested by independent laboratories, one of the largest
of which is Gaming Laboratories International ("GLI"). GLI is presently testing
Fortune's Fortune Poker game and an electronic Bingo game which was developed by
Fortune.
Plan of Operations
During the period ending December 31, 2000 Fortune plans to market its
Fortune Poker and electronic Bingo games to Indian Tribes holding Class III
casino licenses in Minnesota. During the year 2000 Fortune plans to license the
rights to its Rainbow 21 game to third parties who will then attempt to market
the Rainbow 21 game to casino operators.
In order to market its Fortune 21 and electronic Bingo games, the Gaming
Laboratories International will need to complete its testing of the Fortune
Poker game. Fortune expects this testing will be completed by September 2000.
Following the competition of the testing of Fortune's Fortune Poker and
electronic Bingo games Fortune will apply for a gaming license from Minnesota.
While Fortune's application is being reviewed, Fortune will begin negotiations
with Indian Tribal Casinos in Minnesota with a view to the Tribal Casino's
purchase or lease of Fortune's Fortune Poker and/or electronic Bingo games. It
will be Fortune's objective to conclude an arrangement whereby Fortune will
receive a percentage of the net revenues derived from the operation of the
games. The percentage which Fortune expects to receive will vary (typically
between 9% and 23%) depending upon whether the games are purchased or leased
from Fortune and whether Fortune or the particular Tribal Casino operates the
games.
<PAGE>
Fortune does not anticipate any difficulties in obtaining a gaming license
from Minnesota. Contingent with the ability of Fortune to conclude satisfactory
agreements with one or more Tribal Casinos in Minnesota, Fortune expects that
its first Fortune Poker game and/or electronic Bingo game will be installed and
operational in a Minnesota Indian Tribal Casino by September 2000.
If Fortune is successful in obtaining a gaming license in Minnesota,
Fortune plans to apply for gaming licenses in other states (with the exception
of Nevada and states that do not have Class III Indian Tribal casinos) which
have tribal casinos with Class III gaming licenses. However, before applying for
a gaming license in any of these states, Fortune must first obtain the
sponsorship of an Indian tribe which operates a casino in the state.
No assurances, however, can be given that Fortune will be successful in
obtaining any required licenses, permits or approvals, or in obtaining the
sponsorship of any Indian tribe operating casinos in states other than
Minnesota.
Competition
In order to achieve commercial sales of its gaming products, Fortune 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. All
of Fortune's principal competitors are significantly larger, well established in
the gaming industry and are better capitalized than Fortune, all of which
factors could adversely affect Fortune'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.
Employees
As of June 30, 2000, Fortune had two full-time employees and one part-time
employee. Fortune's employees are not represented by a labor union. Fortune has
never experienced an organized work stoppage, strike or labor dispute.
Management considers Fortune's relations with its employees to be good.
<PAGE>
Properties
Fortune leases office space at 333 Orville Wright Court, Las Vegas,
Nevada at a monthly rental of $2,000. The lease on this space expires June 1,
2003.
MANAGEMENT
The following sets forth certain information concerning the management of
Fortune:
Name Age Position
Douglas R. Sanderson 54 President, Chief Executive Officer and a Director
Roland M. Thomas 49 Chief Operating Officer
Robert V. Eberle 46 Chief Financial Officer
Theodore Silvester, Jr. 53 Vice President and a Director
Dick Anagnost 43 Director
Each director holds office until his successor is duly elected by the
stockholders. Executive officers serve at the pleasure of the Board of
Directors.
The following sets forth certain information concerning the past and
present principal occupations of Fortune's officers and directors.
Douglas R. Sanderson has been Fortune's President, Chief Executive Officer
and a Director since June 2000. From June 1994 to March 1997 Mr. Sanderson was
President of the Gaming Division of Sega Enterprises, Inc. From March 1997 to
May 2000 Mr. Sanderson was President of Sega Gaming Technology, Inc.
Roland M. Thomas has been Fortune's Chief Operating Officer since December
1998. Mr. Thomas has been involved in the management of product development,
software, systems, technology project management and international corporate
development for over 20 years. Between February 1996 and September 1998 Mr.
Thomas was the Chief Executive Officer of Casino Software Corporation. Since
August 1993 Mr. Thomas has also been the President of ERT Technology Corp.
Robert V. Eberle has been Fortune's Chief Financial Officer since July
1999. For the past 17 years Mr. Eberle has also been an attorney in private
practice.
Theodore Silvester, Jr. has been Fortune's Vice President and a Director
since July 1999. Between March 1994 and September 1997 Mr. Silvester was the
director of sales and marketing for Professional Video Association, Inc., a
corporation which was acquired by Fortune in September 1997.
Dick Anagnost has been a director of Fortune since February 2000. Mr.
Anagnost has been involved in all aspects of real estate development, management
and finance since 1979.
Douglas R. Sanderson, Roland Thomas, and Theodore Silvester, Jr. devote
substantially all of their time on Fortune's business. Robert Eberle devotes
approximately 50% of his time to Fortune's affairs. Dick Anagnost, as a
director, devotes only a minimal amount of time to Fortune.
<PAGE>
Change in Management
Beginning in December 1998 the management of Fortune changed. The
following provides certain information concerning the dates of service of the
former and present management of Fortune.
Periods of
Name Position Service
David B. Jackson President and a Director 8/97 to 12/98
D. Bruce Horton Chief Financial Officer, 8/97 to 7/99
Secretary and Director
William M. Danton President and a Director 12/98 to 6/00
Roland M. Thomas Chief Operating Officer Since 12/98
Robert V. Eberle Chief Financial Officer Since 7/99
Theodore Silvester, Jr. Vice President and a Director Since 7/99
Dick Anagnost Director Since 2/2000
Douglas R. Sanderson President, Chief Executive Since 6/2000
Officer and a Director
Executive Compensation
The following table sets forth in summary form the compensation received
by (i) the Chief Executive Officer of Fortune and (ii) by each other executive
officer of Fortune who received in excess of $100,000 during the fiscal year
ended December 31, 1999.
Other
Annual Restricted Options
Name and Fiscal Salary Bonus Compen- Stock Granted
Principal Position Year (1) (2) sation (3) Awards (4) (5)
------------------ ----- ------ ----- ----------- ---------- ---------
William M. Danton, 1999 -- -- -- -- --
President and Chief 1998 $125,000 -- -- -- 250,000
Executive Officer 1997 -- -- -- -- --
since December 1998
(1) The dollar value of base salary (cash and non-cash) received.
(2) The dollar value of bonus (cash and non-cash) received.
(3) Any other annual compensation not properly categorized as salary or bonus,
including perquisites and other personal benefits, securities or property.
<PAGE>
(4) Amounts reflect the value of the shares of Fortune's common stock issued as
compensation for services.
The table below shows the number of shares of Fortune's common stock
beneficially owned by the officers listed in the table and the value of such
shares as of December 31, 1999. The closing bid price of Fortune's common stock
on December 31, 1999 was $0.52.
Name Shares Value
William M. Danton 995,000 $517,400
(5) The shares of common stock to be received upon the exercise of all stock
options granted during the fiscal years shown in the table.
The following shows the amounts which Fortune expects to pay to its officers
during the year ending December 31, 2000 and the time which Fortune's officers
plan to devote to Fortune's business. With the exception of Douglas Sanderson,
Fortune does not have employment agreements with any of its officers.
Proposed Time to be Devoted
Name Compensation To Company's Business
Douglas R. Sanderson $200,000 100%
Roland M. Thomas $ 90,000 100%
Robert V. Eberle $ 45,000 50%
Theodore Silvester, Jr. $ 90,000 100%
Employment Contracts
In May 2000 Fortune entered into an employment agreement with Douglas R.
Sanderson. The employment agreement provides for the following:
1. Term of five years.
2. Annual salary of $200,000, plus bonuses as may be approved by Fortune's
Board of Directors.
3. Automobile allowance of $200 per month.
4. Two weeks of paid vacations and the right to participate in any group
medical, group life insurance or any other employee benefit plan that the
Company may, from time to time, maintain.
5. Reimbursement for country club dues in the amount of $_____ per month.
6. Disability benefits.
<PAGE>
7. Premium payments for a $300,000 term life insurance policy with the
beneficiary to be designated by Mr. Sanderson.
8. Options to purchase 1,000,000 shares of Fortune's common stock. See
"Options Granted During Current Fiscal Year" below for more information
concerning these options.
In the event Mr. Sanderson is terminated without cause or Mr. Sanderson
resigns due to constructive termination Fortune would be required to pay Mr.
Sanderson his base salary as well as any benefits that Mr. Sanderson would
otherwise have received under any group medical, group life or similar plan
maintained by Fortune for its employees. For purposes of the employment
agreement the term "constructive termination" means:
o There is a material change in Mr. Sanderson's authority, duties or
activities,
o Mr. Sanderson is removed as Chairman of the Board of Directors or as
Fortune's Chief Executive Officer,
o Mr. Sanderson's salary or his benefits under any employee benefit plan or
program are reduced,
o Mr. Sanderson's office is relocated outside of the Las Vegas, Nevada
metropolitan area, or
o Any successor to Fortune fails to assume Fortune's obligations under the
employment agreement.
Fortune does not have any employment contracts with any of its other
executive officers.
Long Term Incentive Plans - Awards in Last Fiscal Year
None.
Employee Pension, Profit Sharing or Other Retirement Plans
Except as provided in Fortune's employment agreements with its executive
officers, Fortune does not have a defined benefit, pension plan, profit sharing
or other retirement plan, although Fortune may adopt one or more of such plans
in the future.
Compensation of Directors
Standard Arrangements. At present Fortune does not pay its directors for
attending meetings of the Board of Directors, although Fortune expects to adopt
a director compensation policy in the future. Fortune has no standard
arrangement pursuant to which directors of Fortune are compensated for any
services provided as a director or for committee participation or special
assignments.
During the year ended December 31, 1999 Fortune issued 150,000 shares of
its common stock to Dick Anagnost, a director of Fortune, for services rendered.
<PAGE>
With the exception of the foregoing, and except as disclosed elsewhere in
this report, no director of Fortune received any form of compensation from
Fortune during the year ended December 31, 1999.
Compensation Committee Interlocks and Insider Participation
Fortune does not have an Audit Committee or a compensation committee.
Stock Options
Fortune did not issue any options to any officer or director in 1999.
Option Exercises in Last Fiscal Year and Option Values
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
Shares December 31, December 31,
Acquired on Value 1999 Exercisable/ 1999 Exercisable/
Name Exercise (1) Realized (2) Unexercisable (3) Unexercisable (4)
---- ------------ ----------- --------------- ---------------
William M. Danton -- -- 250,000/-- -/-
Roland M. Thomas -- -- 200,000/-- -/-
(1) The number of shares received upon exercise of options during the fiscal
year ended December 31, 1999.
(2) With respect to options exercised during Fortune's fiscal year December 31,
1999, the dollar value of the difference between the option exercise price
and the market value of the option shares purchased on the date of the
exercise of the options.
(3) The total number of unexercised options held as of December 31, 1999,
separated between those options that were exercisable and those options that
were not exercisable. All options held at December 31, 1999 are presently
exercisable.
(4) For all unexercised options held as of December 31, 1999, the excess of the
market value of the stock underlying those options (as of December 31, 1999)
and the exercise price of the option. All options held at are presently
exercisable.
Options Granted During Current Fiscal Year
Shares Issuable Option
Upon Exercise Exercise Expiration
of Option Price Date
Douglas R. Sanderson 500,000 $0.20 4/30/10
Douglas R. Sanderson 500,000 $0.10 4/30/10
The options held by Mr. Sanderson were granted pursuant to Fortune's
Non-Qualified Stock Option Plan.
<PAGE>
The options to purchase 500,000 shares at $0.10 per share may not be
exercised by Mr. Sanderson until he has completed one full year of employment
with Fortune.
Mr. Sanderson may not exercise options to purchase more than 500,000
shares until Mr. Sanderson either (i) obtains a Nevada Gaming License or (ii)
has been employed by Fortune for three full years and during such time Fortune
has not required Mr. Sanderson to obtain a Nevada Gaming License.
If Mr. Sanderson voluntarily terminates his employment with Fortune he will
have 90 days from his last day of employment to exercise his options.
Employee Pension, Profit Sharing or Other Retirement Plans
Except as provided in Fortune's employment agreements with its executive
officers, Fortune does not have a defined benefit, pension plan, profit sharing
or other retirement plan, although Fortune may adopt one or more of such plans
in the future.
Compensation of Directors
Standard Arrangements. At present Fortune does not pay its directors for
attending meetings of the Board of Directors, although Fortune expects to adopt
a director compensation policy in the future. Fortune has no standard
arrangement pursuant to which directors of Fortune are compensated for any
services provided as a director or for committee participation or special
assignments.
Except as disclosed elsewhere in this proxy statement no director of
Fortune received any form of compensation from Fortune during the year ended
December 31, 1998.
Stock Option and Bonus Plans
Fortune has an Incentive Stock Option Plan, a Non-Qualified Stock Option
Plan and Stock Bonus Plan. A summary description of each Plan follows. In some
cases these three Plans are collectively referred to as the "Plans".
Incentive Stock Option Plan.
The Incentive Stock Option Plan authorizes the issuance of options to
purchase up to 2,000,000 shares of Fortune's common stock. Only officers and
employees of Fortune may be granted options pursuant to the Incentive Stock
Option Plan.
In order to qualify for incentive stock option treatment under the
Internal Revenue Code, the following requirements must be complied with:
1. Options granted pursuant to the Plan must be exercised no later than:
(a) The expiration of thirty (30) days after the date on which an option
holder's employment by Fortune is terminated.
<PAGE>
(b) The expiration of one year after the date on which an option
holder's employment by Fortune is terminated, if such termination is
due to the Employee's disability or death.
2. In the event of an option holder's death while in the employ of
Fortune, his legatees or distributees may exercise (prior to the option's
expiration) the option as to any of the shares not previously exercised.
3. The total fair market value of the shares of common Stock (determined
at the time of the grant of the option) for which any employee may be granted
options which are first exercisable in any calendar year may not exceed
$100,000.
4. Options may not be exercised until one year following the date of
grant. Options granted to an employee then owning more than 10% of the common
stock of Fortune may not be exercisable by its terms after five years from the
date of grant.
5. The purchase price per share of common stock purchasable under an
option is determined by the Committee but cannot be less than the fair market
value of the common stock on the date of the grant of the option (or 110% of the
fair market value in the case of a person owning Fortune's stock which
represents more than 10% of the total combined voting power of all classes of
stock).
Non-Qualified Stock Option Plan.
The Non-Qualified Stock Option Plans authorize the issuance of options to
purchase up to 5,000,000 shares of Fortune's common stock. Fortune's employees,
directors, officers, consultants and advisors are eligible to be granted options
pursuant to the Plan, provided however that bona fide services must 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 option
exercise price is determined by the Committee but cannot be less than the market
price of Fortune's common stock on the date the option is granted.
Stock Bonus Plan.
Up to 500,000 shares of common stock may be granted under the Stock Bonus
Plans. Such shares may consist, in whole or in part, of authorized but unissued
shares, or treasury shares. Under the Stock Bonus Plan, Fortune's employees,
directors, officers, consultants and advisors are eligible to receive a grant of
Fortune's shares; provided, however, that bona fide services must be rendered by
consultants or advisors and such services must not be in connection with the
offer or sale of securities in a capital-raising transaction.
Other Information Regarding the Plans.
The Plans are administered by Fortune's Board of Directors. The Board of
Directors has the authority to interpret the provisions of the Plans and
supervise the administration of the Plans. In addition, the Board of Directors
is empowered to select those persons to whom shares or options are to be
granted, to determine the number of shares subject to each grant of a stock
bonus or an option and to determine when, and upon what conditions, shares or
options granted under the Plans will vest or otherwise be subject to forfeiture
and cancellation.
<PAGE>
In the discretion of the Board of Directors, any option granted pursuant
to the Plans may include installment exercise terms such that the option becomes
fully exercisable in a series of cumulating portions. The Board of Directors may
also accelerate the date upon which any option (or any part of any options) is
first exercisable. Any shares issued pursuant to the Stock Bonus Plan and any
options granted pursuant to the Incentive Stock Option Plan or the Non-Qualified
Stock Option Plan will be forfeited if the "vesting" schedule established by the
Board of Directors at the time of the grant is not met. For this purpose,
vesting means the period during which the employee must remain an employee of
Fortune or the period of time a non-employee must provide services to Fortune.
At the time an employee ceases working for Fortune (or at the time a
non-employee ceases to perform services for Fortune), any shares or options not
fully vested will be forfeited and cancelled. In the discretion of the Board of
Directors payment for the shares of common stock underlying options may be paid
through the delivery of shares of Fortune's common stock having an aggregate
fair market value equal to the option price, provided such shares have been
owned by the option holder for at least one year prior to such exercise. A
combination of cash and shares of common stock may also be permitted at the
discretion of the Board of Directors.
Options are generally non-transferable except upon death of the option
holder. Shares issued pursuant to the Stock Bonus Plan will generally not be
transferable until the person receiving the shares satisfies the vesting
requirements imposed by the Board of Directors when the shares were issued.
The Board of Directors of Fortune may at any time, and from time to time,
amend, terminate, or suspend one or more of the Plans in any manner it deems
appropriate, provided that such amendment, termination or suspension cannot
adversely affect rights or obligations with respect to shares or options
previously granted. The Board of Directors may not, without shareholder
approval: make any amendment which would materially modify the eligibility
requirements for the Plans; increase or decrease the total number of shares of
common stock which may be issued pursuant to the Plans except in the case of a
reclassification of Fortune's capital stock or a consolidation or merger of
Fortune; reduce the minimum option price per share; extend the period for
granting options; or materially increase in any other way the benefits accruing
to employees who are eligible to participate in the Plans.
The Plans are not qualified under Section 401(a) of the Internal Revenue
Code, nor are they subject to any provisions of the Employee Retirement Income
Security Act of 1974.
Summary.
The following sets forth certain information as of December 31, 1999,
concerning the stock options and stock bonuses granted by Fortune pursuant to
its Plans. Each option represents the right to purchase one share of Fortune's
common stock.
Shares
Total Shares Reserved for Shares Remaining
Reserved Outstanding Issued As Options/Shares
Name of Plan Under Plan Options Stock Bonus Under Plan
------------ ---------- ------------ ----------- -------------
Incentive Stock Option
Plan 2,000,000 -- N/A 2,000,000
<PAGE>
Non-Qualified Stock
Option Plan 5,000,000 1,950,000 N/A 3,050,000
Stock Bonus Plan 500,000 N/A -- 500,000
Transactions with Related Parties.
See "Business" for information concerning Fortune's acquisition of
Professional Video Association, Inc. ("PVA"). William Danton, an officer and
director of Fortune, was a controlling shareholder of PVA.
See "Business" for information concerning Fortune's acquisition of the
Rainbow 21 game from Rainbow, Inc. Theodore Silvester, Jr., an officer and
director of Fortune, owns 20% of Team Rainbow, Inc.
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of June 30, 2000, information with
respect to the only persons owning beneficially 5% or more of the outstanding
common stock and the number and percentage of outstanding shares owned by each
director and officer and by Fortune's officers and directors as a group. Unless
otherwise indicated, each owner has sole voting and investment powers over his
shares of common stock.
Number of Percent of
Name and Address Shares (1) Class
Douglas R. Sanderson -- --
333 Orville Wright Court
Las Vegas, NV 89119
Roland M. Thomas -- --
2700 East Sunset Road
Suite #39
Las Vegas, NV 89120
Robert V. Eberle -- --
200 Walnut Street
Suite G
Saugus, MA 01906
Theodore Silvester, Jr. 35,000 (2) *
144 Elm Street, 2nd floor
Suite 16
Biddeford, ME 04005
Dick Anagnost 150,000 *
730 Pine Street
Manchester, NH 03104-3108
<PAGE>
Number of Percent of
Name and Address Shares (1) Class
William M. Danton 1,245,000 (3) 4.8%
144 Elm Street, 2nd floor
Suite 16
Biddeford, ME 04005
Officers and Directors as a 185,000 *
Group (5 persons)
* Less than 1%
(1) Excludes shares issuable prior to September 30, 2000 upon the exercises of
options granted to the following persons:
Shares Issuable
Upon Exercise Option Expiration
Name of Option Exercise Price Date of
Option
Douglas R. Sanderson 500,000 $0.20 4/30/10
Roland M. Thomas 200,000 $0.90 5/22/03
Robert Eberle -- -- --
Theodore Silvester, Jr. 125,000 $0.90 5/22/03
Dick Anagnost -- -- --
William M. Danton 250,000 $0.90 5/22/03
(2) Excludes 870,000 shares held by Team Rainbow, Inc., a corporation in which
Mr. Sylvester owns a 20% interest.
(3) Shares are registered in the name of WWT&T Ltd. Mr. Danton may be
considered the beneficial owner of these shares.
SELLING SHAREHOLDERS
This prospectus relates the sale of shares of Fortune's common stock by
certain owners of such shares. The shares were issued by Fortune in various
private offerings for cash, services rendered, and in settlement of amounts owed
by Fortune to various third parties.
The owners of the common stock to be sold by means of this prospectus are
referred to as the "selling shareholders".
Fortune will not receive any proceeds from the sale of the shares by
the selling shareholders. The selling shareholders may resell the shares they
acquire by means of this prospectus from time to time in the public market. The
costs of registering the shares offered by the selling shareholders are being
paid by Fortune. The selling shareholders will pay all other costs of the sale
of the shares offered by them.
The following table identifies the selling shareholders and the shares which
are being offered for sale by the selling shareholders.
<PAGE>
Shares Shares to Be Share
Presently Sold in this Ownership
Name Owned Offering After Offering
WWT&T, Ltd. 1,245,000 1,245,000 --
Anastasia Danton 470,000 470,000 --
Jones Gable & Company Limited 12,700 12,700 --
Pro Genesis Securities, Inc. 12,700 12,700 --
Andrew Kaneb 150,000 150,000 --
Dick Anagnost 150,000 150,000 --
C. Wesley Gardner, Jr. 25,000 25,000 --
David J. Day 200,000 200,000 --
Ken P. Gelinas 40,000 40,000
James G. Baldini 71,429 71,429 --
William H. Kelley 42,857 42,857 --
John J. Collins 29,796 29,796 --
Paul D. Kaneb Limited Partnership 375,887 375,887 --
Richard Chase 10,000 10,000 --
Stephen F. Talarico 20,000 20,000 --
Talarico Companies, Inc. 50,000 50,000 --
Jeffrey A. Denner 60,000 60,000 --
Steven W. Schubert 20,000 20,000 --
Team Rainbow, Inc. 870,000 870,000 --
Sentry Fortress Enterprises, Inc. 150,000 150,000 --
Theodore Silvester, Jr. 35,000 35,000 --
William E. Gilmore Jr. Family LLC 300,000 300,000 --
<PAGE>
Shares Shares to Be Share
Presently Sold in this Ownership
Name Owned Offering After Offering
Jeffrey Fox 22,000 22,000 --
WSC Financial Services 200,000 200,000 --
Peter C. Mourmouras 14,000 14,000 --
James D. Reid 20,000 20,000 --
Genesis Investment Group 68,521 68,521 --
Genesis Millennium Capital, LLC 1,642,857 1,642,857 --
WWT&T, Ltd. 250,000 250,000 --
Worldwide American Technical
Services 875,000 875,000 --
Worldwide American Cadmium, LTD 925,000 925,000 --
Encore Enterprises, LTD 875,000 875,000 --
Chromatin, Inc. 757,143 757,143 --
Independent Security, LTD 600,000 600,000 --
------------
10,589,890
WWT&T is affiliated with William Danton, a former officer and director of
Fortune.
Manner of Sale. The shares of common stock owned, or which may be
acquired, by the selling shareholders may be offered and sold by means of this
prospectus from time to time as market conditions permit in the over-the-counter
market, or otherwise, at prices and terms then prevailing or at prices related
to the then-current market price, or in negotiated transactions. These shares
may be sold by one or more of the following methods, without limitation:
o a block trade in which a broker or dealer so engaged will attempt to sell
the shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
o purchases by a broker or dealer as principal and resale by such broker or
dealer for its account pursuant to this prospectus;
o ordinary brokerage transactions and transactions in which the broker
solicits purchasers; and
o face-to-face transactions between sellers and purchasers without a
broker/dealer.
<PAGE>
In effecting sales, brokers or dealers engaged by the selling shareholders
may arrange for other brokers or dealers to participate. Such brokers or dealers
may receive commissions or discounts from selling shareholders in amounts to be
negotiated.
The selling shareholders and any broker/dealers who act in connection with
the sale of the Shares hereunder may be deemed to be "underwriters" within the
meaning of ss.2(11) of the Securities Acts of 1933, and any commissions received
by them and profit on any resale of the Shares as principal might be deemed to
be underwriting discounts and commissions under the Securities Act. Fortune has
agreed to indemnify the selling shareholders and any securities broker/dealers
who may be deemed to be underwriters against certain liabilities, including
liabilities under the Securities Act as underwriters or otherwise.
Fortune has advised the selling shareholders that they and any securities
broker/dealers or others who may be deemed to be statutory underwriters will be
subject to the prospectus delivery requirements under the Securities Act of
1933. Fortune has also advised each Selling Shareholder that in the event of a
"distribution" of the shares owned by the Selling Shareholder, such Selling
Shareholder, any "affiliated purchasers", and any broker/dealer or other person
who participates in such distribution may be subject to Rule 102 under the
Securities Exchange Act of 1934 ("1934 Act") until their participation in that
distribution is completed. Rule 102 makes it unlawful for any person who is
participating in a distribution to bid for or purchase stock of the same class
as is the subject of the distribution. A "distribution" is defined in Rule 102
as an offering of securities "that is distinguished from ordinary trading
transactions by the magnitude of the offering and the presence of special
selling efforts and selling methods". Fortune has also advised the selling
shareholders that Rule 101 under the 1934 Act prohibits any "stabilizing bid" or
"stabilizing purchase" for the purpose of pegging, fixing or stabilizing the
price of the common stock in connection with this offering.
DESCRIPTION OF SECURITIES
Common Stock
Fortune is authorized to issue 30,000,000 shares of common stock. Holders
of common stock are each entitled to cast one vote for each share held of record
on all matters presented to shareholders. Cumulative voting is not allowed;
hence, the holders of a majority of the outstanding common stock can elect all
directors.
Holders of common stock are entitled to receive such dividends as may be
declared by the Board of Directors and, in the event of liquidation, to shares
pro rata in any distribution of Fortune's assets after payment of liabilities.
The Board of Directors is not obligated to declare a dividend. It is not
anticipated that dividends will be paid in the foreseeable future.
Holders of common stock do not have preemptive rights to subscribe to
additional shares if issued by Fortune. There are no conversion, redemption,
sinking fund or similar provisions regarding the common stock. All of the
outstanding shares of common stock are fully paid and nonassessable.
Preferred Stock
Fortune is authorized to issue up to 5,000 shares of preferred stock.
Fortune's Articles of Incorporation provide that the Board of Directors has the
<PAGE>
authority to divide the preferred stock into series and, within the limitations
provided by Delaware statute, to fix by resolution the voting power,
designations, preferences, and relative participation, special rights, and the
qualifications, limitations or restrictions of the shares of any series so
established. As the Board of Directors has authority to establish the terms of,
and to issue, the preferred stock without shareholder approval, the preferred
stock could be issued to defend against any attempted takeover of Fortune.
In October 1997 Fortune's Board of Directors established Fortune's Series
A, Series B and Series C Preferred Stock. Fortune then acquired all of the
issued and outstanding shares of Fortune Entertainment Corporation, a
corporation organized under the laws of the Bahamas ("Fortune/Bahamas") for
1,090,464 shares of common stock, 1,090,464 shares of Series A Preferred Stock,
1,090,4664 shares of Series B Preferred Stock, 1,090,464 shares of Series C
Preferred Stock. Each share of Fortune's Preferred Stock is, at the option of
the holder, convertible into one share of Fortune's common stock. As of June 30,
2000, 28,143 shares of Series A Preferred Stock, 28,143 shares of Series B
Preferred Stock, and 32,143 shares of Series C Preferred Stock had not been
converted into shares of Fortune's common stock and remained outstanding.
The holders of Fortune's Series A, Series B and Series C Preferred Stock,
in preference to the holders of Fortune's common stock, are entitled to receive,
when, as and if declared by the Board of Directors, annual dividends payable in
cash on the 1st day of January, in each year, commencing on January 15, 1998, at
the rate of $0.01 per share per year. Dividends which are not declared do not
accrue. Dividends not declared do not cumulate. Accrued, but unpaid dividends do
not bear interest. Fortune has not declared, and does not plan to declare, any
dividends on its outstanding shares of preferred stock.
Transfer Agent Continental Stock Transfer & Trust Company is the transfer agent
for Fortune's common stock.
EXPERTS
The audited consolidated balance sheet of Fortune Entertainment
Corporation as of December 31, 1999, and the related Statements of Operations,
of Changes in Deficiency in Assets and of Cash Flows for the year ended December
31, 1999, included herein have been audited by Gordon, Harrington & Osborn, PC,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing in giving said report.
LITIGATION
Fortune's subsidiary, Fortune Entertainment Corporation of British
Columbia, Canada, commenced an action in the Vancouver Registry of the Supreme
Court of British Columbia on May 6, 1998 against Advanced Gaming Technology,
Inc. to recover $990,000 as a debt owed by defendant to plaintiff pursuant the
defendant's written agreement made March 30, 1998 to pay plaintiff $990,000 to
repurchase from plaintiff the plaintiff's right to participate in defendant's
interest in a United Kingdom bingo project. The Plaintiff intends to make an
application to the Supreme Court of British Columbia for a summary trial of the
action. See Note 5 of Notes to Consolidated Financial Statements.
<PAGE>
With the exception of the foregoing, Fortune is not involved in any legal
proceedings.
INDEMNIFICATION
Section 145 of the Delaware General Corporation Law permits a corporation
to grant indemnification to directors, officers, employees and other agents in
terms sufficiently broad to permit indemnification under certain circumstances
for liabilities, including expenses, arising in connection with the Securities
Exchange Act of 1934, as amended, and the Securities Act of 1934, as amended.
Pursuant to its Certificate of Incorporation and Bylaws, Fortune is empowered to
indemnify its directors and officers to the fullest extent permitted by law.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 or the Securities Exchange Act of 1934 may be permitted to
directors, officers or persons controlling Fortune pursuant to the foregoing
provisions, Fortune has been informed that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 and the Securities Exchange Act of 1934 and is
therefore unenforceable.
AVAILABLE INFORMATION
Fortune is subject to the informational requirements of the Securities
Exchange Act of l934 and in accordance therewith is required to file reports,
proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Copies of any such reports, proxy statements and
other information filed by Fortune can be inspected and copied at the public
reference facility maintained by the Securities and Exchange Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. and at the Securities and
Exchange Commission's Regional offices in New York (7 World Trade Center, Suite
1300, New York, New York 10048) and Chicago (Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511). Copies of such
material can be obtained from the Public Reference Section of the Securities and
Exchange Commission at its office in Washington, D.C. 20549 at prescribed rates.
Certain information concerning Fortune is also available at the Internet Web
Site maintained by the Securities and Exchange Commission at www.sec.gov Fortune
has filed with the Securities and Exchange Commission a Registration Statement
on Form SB-2 (together with all amendments and exhibits) under the Securities
Act of 1933, as amended (the "Act"), with respect to the Securities offered by
this prospectus. This prospectus does not contain all of the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Securities and Exchange
Commission. For further information, reference is made to the Registration
Statement.
<PAGE>
FORTUNE ENTERTAINMENT
CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
<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 of December 31,
1999 and the related consolidated statements of operations, stockholders' equity
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit. The financial
statements of Fortune Entertainment Corporation as of December 31, 1998, were
audited by other auditors whose report dated February 12, 1999, on those
statements included an explanatory paragraph that described the development
stage of the enterprise as discussed in Note 1 to the financial statements.
We conducted our audit in accordance with 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 1999 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Fortune
Entertainment Corporation as of December 31, 1999, and the consolidated results
of its operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
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 its 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. Management's plans
regarding those matters are also described in Note 1. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
North Andover, MA
April 12, 2000
GORDON, HARRINGTON & OSBORN, PC
Certified Public Accounts
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
(A development stage enterprise)
CONSOLIDATED BALANCE SHEET
(See Basis of Presentation - Note 1)
December 31, 1999 and 1998
ASSETS 1999 1998
---- ----
Current:
Cash $ 22,397 $ 353,543
Accounts receivable 2,635 22,423
Prepaid expenses and other current assets - 8,598
---------------- ------------
Total current assets 25,032 384,564
Deposits 9,879 9,879
Investments 1,356,658 1,183,751
Property and equipment, net of accumulated 73,146 90,978
depreciation of $39,973 and $22,141,
respectively.
Goodwill, net of accumulated amortization of
$135,824, and $74,624, respectively. 477,636 538,836
Intellectual property, net of accumulated
amortization of $1,208,198 and $594,198,
respectively 4,933,789 5,547,789
----------- ---------
Total assets $ 6,876,140 $7,755,797
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current:
Accounts payable and accrued liabilities $ 385,134 $ 604,704
Due to related parties 1,072,491 595,980
Loans payable 370,000 470,000
Purchase consideration payable 405,000 923,750
------------ ----------
Total current liabilities 2,232,625 2,594,434
Purchase consideration payable - 231,250
--------------- ----------
Total liabilities 2,232,625 2,825,684
--------- ---------
Commitments and contingencies
Stockholders' Equity:
Share stock
Common stock, $0.0001 par value,
30,000,000 authorized, 18,093,615 and
13,925,256 respectively issued and
outstanding 1,810 1,393
Preferred stock, $0.0001 par value,
convertible
Class A, B and C Preferred stock:
5,000,000 authorized, 32,864; 32,864;
36,864 (1998 - 130,864; 231,864;
488,578) issued and outstanding,
respectively 10 85
Additional paid in capital 10,795,642 9,017,958
Share stock to be issued 138,703 210,000
Stock based compensation 465,000 465,000
Accumulated deficit (6,757,650) (4,764,323)
----------- ---------
Total stockholders' equity 4,643,515 4,930,113
----------- ---------
Total liabilities and stockholders' $ 6,876,140 $7,755,797
equity =========== =========
The accompanying notes are an integral
part of the financial statements.
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
(A development stage enterprise)
CONSOLIDATED STATEMENT OF OPERATIONS
December 31, 1999 and 1998
Period from
August 25,
1997
(inception)
Year Ended Year Ended to December
December 31, December 31, 31,
1999 1998 1999
---- ---- ----
Expenses:
Amortization of intangible $ 675,200 $ 655,543 $1,344,021
assets
Bank charges and interest 107,618 106,138 221,803
Depreciation 17,832 18,163 40,305
Foreign exchange (gain) loss (6,124) (2,795) (4,238)
General and administration 182,856 115,908 320,326
Legal and accounting 485,075 308,622 853,351
Management fees 255,000 319,103 700,153
Office and miscellaneous 25,656 376,822 420,612
Consulting fees 159,771 709,850 914,782
Rent 51,277 63,003 122,795
Salaries and wages - 66,834 101,545
Stock based compensation - 465,000 465,000
Travel, promotion and
entertainment 40,480 106,018 224,496
----------- ---------- ----------
1,994,641 3,308,209 5,724,951
--------- --------- ---------
Loss before the following: (1,994,641) (3,308,209) (5,724,971)
Investment valuation reserve - - (1,034,013)
Interest income 1,314 - 1,314
---------- --------- ----------
Loss for period (1,993,327) (3,308,209) (6,757,650)
Deficit, beginning of period (4,764,323) (1,456,114) -
--------- --------- ----------
Deficit, end of period $(6,757,650) $(4,764,323) $(6,757,650)
========= ========= =========
Basic and diluted loss per share (0.12) (0.36)
The accompanying notes are an integral
part of the financial statements.
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
(A development stage enterprise)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
December 31, 1999 and 1998
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Common Stock Preferred Stock
----------------------------------------
Stock Common
Number of Number Paid in Accumulated Based Shares to
Shares Amount of Shares Amount Capital Deficit Compensation be Issued Total
------ ------ ------- ------- ------------ --------- -----
Balance, December 31, 4,265,920 $ 427 3,271,392 $327 $1,547,188 $(1,456,114) $ - $1,675,000 $1,766,828
1997
Issuance of common stock 7,239,250 724 7,470,770 (1,675,000) 5,796,494
Conversion of preferred 2,420,086 242 (2,420,086) (242) -
stock
Common stock to be 210,000 210,000
issued
Stock based compensation 465,000 465,000
Loss for the period - - - - - (3,308,209) - - (3,308,209)
---------- --------- ---------- ------- ----------- --------- ----------- ----------- -----------
Balance, December 31, 13,925,256 1,393 851,306 85 9,017,958 (4,764,323) 465,000 210,000 4,930,113
1998
Issuance of common stock 3,419,645 342 1,777,684 (150,000) 1,628,026
Conversion of preferred 748,714 75 (748,714) (75) -
stock
Common stock to be 78,703 78,703
issued
Loss for the period - - - - - (1,993,327) - - (1,993,327)
----------- -------- --------- -------- ----------- --------- ----------- ----------- -----------
Balance, December 31, 18,093,615 $1,810 102,592 $ 10 $10,795,642$(6,757,650) $465,000 $ 138,703 $4,643,515
========== ===== ======= ==== ========== ========= ======= ======== ============
1999
</TABLE>
The accompanying notes are an integral
part of the financial statements.
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
(A development stage enterprise)
CONSOLIDATED STATEMENT OF CASH FLOWS For the years
ended December 31, 1999 and 1998
Period from August
Year Ended Year Ended 25, 1997
December 31, December 31, (inception) to
1999 1998 December 31, 1999
---- ---- ----
Operating activities:
Net loss for period $(1,993,327) $(3,308,209) $(6,757,650)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Amortization of intangible
assets 675,200 655,543 1,344,021
Depreciation 17,832 18,163 40,305
Investment valuation reserve - - 1,034,013
Stock based compensation - 465,000 465,000
Shares issued, or to be
issued for services 113,793 210,020 323,813
Changes in operating assets
and liabilities:
Accounts receivable 19,788 5,760 2,635
Prepaid expenses, deposits
and other current assets 8,598 4,019 (9,879)
Accounts payable and accrued
liabilities (219,570) 857,914 712,775
--------- ---------- ----------
Net cash used in operating
activities (1,377,686) (1,091,790) (2,844,967)
--------- --------- ---------
Investing activities:
Acquisition of property and
equipment - (41,334) (47,351)
Acquisition of investments (172,907) (1,071,250) (1,288,171)
Purchase price consideration
payments (380,000) (350,000) (730,000)
Business acquisitions, net of
cash required - (12,500) (31,350)
- ----------- -----------
Net cash used in investing
activities (552,907) (1,475,084) (2,096,872)
--------- --------- ---------
Financing activities:
Proceeds from capital
contributions 1,089,326 2,147,900 3,657,510
Share subscriptions received 133,610 150,000 133,610
Borrowings under loans payable - 262,403 347,074
Advances from related parties 476,511 318,224 926,042
Payment of loans (100,000) - (100,000)
---------- -------- ----------
Net cash provided by financing
activities 1,599,447 2,878,527 4,964,236
--------- --------- ----------
Net increase (decrease) in cash
during the period (331,146) 311,653 22,397
Cash at beginning of period 353,543 41,890 -
---------- ----------- ---------------
Cash at end of period $22,397 $353,543 $22,397
======= ======== =========
The accompanying notes are an integral
part of the financial statements.
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 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 a reverse acquisition whereby FET, Inc. is deemed to have acquired
the Company. Accordingly, the consolidated balance sheets of the Company are
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 of 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.
The Company's financial statements for the years ended December 31, 1999 and
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 $1,993,327 and $3,308,209 for the years ended December 31, 1999 and
1998, and as of December 31, 1999 and 1998 had a working capital deficiency of
$2,207,593 and $2,209,870, respectively. 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, 1999 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
assets - 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.
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 1 - NATURE OF BUSINESS AND LIQUIDITY (continued)
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.
NOTE 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.)
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 result 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., (SGTI) a Private
company, is recorded at cost.
As of April 3, 2000, SGTI and SEGA Enterprises have agreed; along with SGTI
shareholders (of which the Company is one), to sell the SGTI stock to SEGA
Enterprises for $8.00 per share.
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.
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
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).
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
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
computed giving effect to all dilutive potential common shares that were
outstanding during the period. As of December 31, 1999 and 1998, the diluted
loss per share will be equivalent to the basic loss per share since the company
is in a loss position.
NOTE 3 - BUSINESS ACQUISITIONS
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:
# of shares
Purchase price $1,542,657
Consideration given:
Common Stock 1,094,464 385,665
Series A Preferred Stock 1,094,464 385,664
Series B Preferred Stock 1,094,464 385,664
Series C Preferred Stock 1,094,464 385,664
----------
$1,542,657
All of the Preferred Stock is convertible at specific dates as described in Note
9. The value ascribed to the shares as shown above represents the value of the
issued and outstanding share stock of FECB immediately prior to the transaction.
The purchase price has been allocated according to the estimated fair values of
the assets and liabilities of FECB as follows:
Cash $ 26,150
Accounts receivable 17,268
Prepaid expenses 10,123
Property and equipment 66,100
Investment in Advanced Gaming Technology,
Inc. (note 5) 990,000
Fortune Poker (notes 3 and 4) 321,986
Accounts payable (23,480)
Loan payable (250,000)
Due to related parties (228,950)
Goodwill on acquisition 613,460
----------
$1,542,657
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 3 - BUSINESS ACQUISITIONS (continued)
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).
Details of this acquisition are as follows:
# of shares
Purchase Price $5,106,986
---------
Consideration:
Investment in Fortune Poker acquired in the
FECB acquisition 321,986
Cash paid to December 31, 1997 pursuant to
the agreement 35,000
-----------
Sub-total
Cash payments due 3,340,000
Common shares to be issued 705,000 1,410,000
---------
$5,106,986
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.
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 August 7, 1999. This difference was to be
paid on or before August 15, 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
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 3 - BUSINESS ACQUISITIONS (continued)
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 $146,000 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 at
December 31, 1998.
During the year ended December 31, 1999, the agreement was further amended as
follows:
The Company issued no shares of commons stock to the Danton Group in 1999 and
paid the Danton Group $300,000 in 1999.
The agreement with the Danton Group further requires the Company to pay the
Danton Group the balance of $405,000 by April 30, 2000, pay the Danton Group 20%
of all up-front licensing fees paid or payable to the Company with respect to
the Fortune Poker game, and until the expiration of the Patent, or any renewals
or extensions of the Patent, issue additional shares of its common stock to the
Danton Group in an amount determined by the following formula:
Net earnings x Percentage
Average Share Price
Percentage is 4% in 2000, 5% in 2001 and 10% in 2002 and thereafter provided
that the percentage will automatically increase to 10% if Net Earnings are at
least $10,000,000.
Net earnings means the Company's earnings during each twelve month period ending
December 31 from the revenues derived from the Fortune Poker game before income
tax, depreciation and amortization.
Average Share Price means the average trading price of the Company's common
stock for the last 30 trading days of the Company's fiscal year.
The Company has agreed to register for public sale the shares of its common
stock issued pursuant to this within 180 days of their issuance.
The acquisition of Fortune Poker included the assumption of a Manufacturing
Agreement. As amended April 24, 1998, the Manufacturing Agreement provides
Amusement World, Inc. with the exclusive right to manufacture Fortune Poker
terminals for the Company until April 23, 2008. The cost to the Company for each
terminal will range from $2,700 to $3,600 depending upon the type of teminal
ordered by the Company. The cost of the terminals will increase based upon
increases in the Consumer Price Index. Although the Manufacturing Agreement
provides that a minimum of 333
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 3 - BUSINESS ACQUISITIONS (continued)
terminals are required to be purchased from Amusement World during each of the
twelve month periods ending April 23, 1999, 2000 and 2001 and as of December 31,
1999, no terminals have been purchased. The agreement relates to class II
devices which are not yet approved.
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:
# of Shares
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 by July 31, 1998 250,000 562,500
----------
$1,035,000
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, 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 and accounted for pursuant to
Emerging Issues Task Force Abstract 97-15. Of the cash balance due, $450,000 was
outstanding at December 31, 1998. The entire purchase price has been allocated
to the Intellectual Property (see Note 4).
During 1999, in completion of the transfer of the assets relating to Rainbow 21
Game, the Company paid TRI $80,000 and issued TRI 500,000 shares of its common
stock.
The Company's agreement with TRI was amended on October 13, 1999 in which
500,000 shares would be issued to TRI with no further payments of any kind to be
due to TRI. The only existing agreement with TRI, as outlined in the October 13,
1999 amendment, states that the Company guarantees the FEC shares will have a
value of $2.00 per share by August 1, 2000 or the Company will issue cash or
shares of the equivalent value for the deficit.
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 4 - INTELLECTUAL PROPERTY
Intellectual property consists of the patented software inventions discussed in
Note 3 known respectively as Fortune Poker and Rainbow 21.
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.
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) 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.
Rainbow 21
Pursuant to the TRI acquisition as discussed in Note 3, the Company has the
following obligations:
1. 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.
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 4 - INTELLECTUAL PROPERTY (continued)
a. pay TRI the difference between $562,500 less 250,000 multiplied by the
Market Price (the "Difference"); or
b. 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.
2. 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.
3. 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.
4. 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 [1] 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 [2] to [4] 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.
NOTE 5 - INVESTMENTS
Investments consist of the following:
1999 1998
---- ----
Sega Gaming Technology, Inc. $1,356,658 $1,183,750
Advanced Gaming Technology, Inc. 1,034,013 1,034,014
Less valuation reserve (1,034,012) (1,034,013)
--------- ---------
$1,356,659 $1,183,751
========= =========
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.
In 1999, the Company acquired 57,636 shares of the common stock of SEGA Gaming
Technology, Inc. (SGTI), a Nevada Corporation for $172,907. The 188,886 shares
which the Company presently owns in SGTI represent 17% of SGTI's issued and
outstanding common stock. SGTI was incorporated in 1995 and through a licensing
agreement with SEGA of Japan (SEGA), has the exclusive rights to market certain
multi-player gaming machines of SOJ in various areas of the world.
In April 2000 the Company plans to sell its interest in SGTI to SEGA
Enterprises, LTD for $8.00 per share under a proposal from the Company for a
total of $1,511,188.
Advanced Gaming Technology, Inc. ("AGT") was engaged in the business of
designing and developing electronic bingo products. During the 1997 year, AGT
filed for chapter 11 bankruptcy protection in the state of Nevada.
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following of:
December 31, 1999
Accumulated
Cost Depreciation
Furniture and equipment $ 94,487 $26,647
Computer equipment and software 12,381 10,200
Leasehold improvements 6,251 3,126
--------- -------
$113,119 $39,973
========= =======
Net property and equipment $73,146
=======
December 31, 1998
Accumulated
Cost Depreciation
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
======== ========
Net property and equipment $90,978
=======
NOTE 7 - RELATED PARTIES TRANSACTIONS
For the years ended December 31, 1999 and 1998 management fees of $255,000 and
$319,103, respectively and rent, utilities, and office and miscellaneous costs
of $37,656 and $57,007; respectively, were charged by companies controlled by
the directors.
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 incur interest at 10% and do not have stated terms of
repayment. Interest expense for 1999 was $63,552.
The Company rents its office space in Biddleford, ME from an officer of the
corporation. Monthly rent expense is $1,000. They are a tenant-at-will. Rent
expense for 1999 is accrued for $12,000.
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 8 - LOANS PAYABLE
Loans payable consist of the following as of December 31:
1999 1998
---- ----
B. Benedet Holdings, Inc., due on
April 15, 2000 $320,000 $320,000
Caulfield Management Ltd., due June 30, 1999,
with interest at 12%. 50,000 150,000
---------- -------
$370,000 $470,000
Interest accrued during the years ended December 31, 1999 and 1998 amounted to
$20,219 and $32,540, respectively.
As collateral for the Caulfield Management Ltd., loan, the Company has assigned
a portion of the shares of Sega Gaming Technology, Inc.
NOTE 9 - CAPITAL STOCK
Authorized
Holders of the Common Stock are entitled to one vote per share equally in any
dividends declared and in distributions in liquidations.
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
Issued
Number of Shares
Common Stock:
Balance at January 1, 1998 $ 4,265,920 $ 390,950
Issued for cash
Pursuant to private placement 179,000 309,400
Pursuant to unit offering 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
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 9 - CAPITAL STOCK (continued)
Issued pursuant to exercise of stock options
and warrants for settlement of dept 955,000 286,500
Issued as partial consideration for TRI 250,000 562,500
Issued related to Fortune Poker acquisition 1,847,500 3,695,000
Issued as partial consideration for SGT
investment 150,000 112,500
Shares issued as signing bonus 200,000 150,020
Shares issued for settlement of accounts payable 87,500 125,000
Shares issued for settlement of load 446,917 127,074
Commissions on share issuance - (64,000)
----------------- -------------
Balance, December 31, 1998 13,925,256 8,718,355
Common Stock:
Pursuant to unit offering 2,687,695 1,294,233
Conversion of Series A Preferred Shares 98,000 34,660
Conversion of Series B Preferred Shares 199,000 70,380
Conversion of Series C Preferred Shares 451,714 159,757
Shares issued for settlement of accounts payable
and expenses 231,950 113,793
Shares issued for settlement of loan 500,000 370,000
------------- ------------
Balance, December 31, 1999 18,093,615 $10,761,178
========== ==========
Class A Preferred stock:
Balance, December 31, 1997 1,090,464 $385,664
--------- -------
Shares converted to common stock (959,600) (339,381)
---------- -------
Balance, December 31, 1998 130,864 46,283
---------- --------
Class B Preferred stock
Balance, December 31, 1997 1,090,464 385,664
--------- -------
Shares converted to common stock (858,600) (303,661)
---------- -------
Balance, December 31, 1998 231,864 82,003
---------- --------
Class C Preferred stock
Balance, December 31, 1997 1,090,464 385,664
--------- -------
Shares converted to common stock (601,886) (212,869)
--------- -------
Balance, December 31, 1998 488,578 172,795
---------- -------
Total preferred stock, December 31, 1998 851,306 $301,081
========== ========
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 9 - CAPITAL STOCK (continued)
Class A Preferred stock:
Balance, December 31, 1998 130,864 $ 46,283
Shares converted to common stock (98,000) (34,660)
------------ --------
Balance, December 31, 1999 32,864 11,623
----------- --------
Class B Preferred stock
Balance, December 31, 1998 231,864 82,003
Shares converted to common stock (199,000) (70,380)
---------- --------
Balance, December 31, 1999 32,864 11,623
----------- --------
Class C Preferred stock
Balance, December 31, 1998 488,578 172,795
Shares converted to common stock (451,714) (159,757)
---------- -------
Balance, December 31, 1999 36,864 13,038
----------- --------
Total preferred stock, December 31, 1999 102,592 $ 36,284
========== =========
As of 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, the Company is required to issue 100,000 common
shares at a value of $60,000.
As of December 31, 1999, the Company had received cash in the amount of $73,610
for the issuance of 155,653 shares of common stock. There are 14,550 shares to
be issued for an expense of $5,093.
Stock option transactions for the respective periods and the number of stock
options outstanding are summarized as follows:
No. of common
shares issuable
Balance, December 31, 1997 1,050,000
Options granted *3,755,000
Options exercised (815,000)
Options expired (100,000)
----------
Balance, December 31, 1998 3,890,000
Options cancelled (900,000)
Options expired (1,030,000)
---------
Balance, December 31, 1999 1,960,000
=========
*All options issued are subject to shareholder approval at the Company's annual
general meeting.
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 9 - CAPITAL STOCK (continued)
At December 31, 1998, the following options were outstanding:
No. of common
shares issuable Exercise price Date of expiry
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 1.50 May 14, 2000
** 200,000 2.00 May 14, 2000
** 200,000 2.50 November 14, 1999
** 200,000 3.00 May 14, 1999
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 1.25 March 12, 1999
50,000 1.50 June 12, 1999
-----------
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.
At December 31, 1999, the following options were outstanding:
No. of common
shares issuable Exercise price Date of expiry
435,000 $0.30 October 14, 2002
525,000 0.90 May 22, 2003
** 200,000 1.50 May 14,2000
** 200,000 2.00 May 14, 2000
600,000 0.75 Option if full force until
termination of
---------- consulting agreement
**These options are only exercisable if, on the date of exercise, the share
price is at least twice the exercise price.
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 9 - CAPITAL STOCK (continued)
At December 31, 1998 common share purchase warrants outstanding were as follows:
No. of common
shares issuable Exercise price Date of expiry
400,000 0.35 April 1, 2003
160,000 0.30 December 31, 2000
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
At December 31, 1999 common share purchase warrants outstanding were as follows:
No. of common
shares issuable Exercise price Date of expiry
2,825,000 0.50 March 30, 2003
200,000 0.50-0.60 April 8, 2000 - July 16, 2001
433,333 0.75 August 20, 2000 - August 20, 2001
300,000 0.75 July 17, 2000
1,270,000 0.60 November 18, 2000 - December 15,
2000
During the period, 1,940,000 warrants were issued and none were exercised. The
expiration date of 2,825,000 warrants was extended until March 30, 2003. These
warrants have an exercise price of $0.50 per share.
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:
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 9 - CAPITAL STOCK (continued)
1999 1998
---- ----
Loss As reported (1,993,327) (3,308,209)
Pro forma (1,993,327) (4,568,709)
Basic and diluted
loss per share As reported (0.12) (0.36)
Pro forma (0.12) (0.49)
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.
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 1998, where
the stock price is equal to the exercise price of the options was $0.60; when
the stock price is greater than the exercise price of the options, the weighted
-average fair value is $0.63. Accordingly, the respective weighted average
exercise price of options granted during the year was $0.92 and $0.60.
The basic and diluted loss per share for the period ended December 31 is based
on the following:
December 31, December 31,
1999 1998
------------ -----------
Net loss for the period $(1,993,327) $(3,308,209)
Weighted average number of common shares
used in computation 16,486,385 9,241,847
Basic and diluted loss per share (0.12) (0.36)
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 of various dates to December 18, 2000.
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 9 - CAPITAL STOCK (continued)
During the year ended December 31, 1998 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.
During the year ended December 31, 1999 the Company issued 1,940,000 warrants
for $967,000. Each unit comprised one common share and one share purchase
warrant entitling the holder to acquire one common share for $0.50 to $0.60 per
common share of various dates to March 31, 2003.
During the year ended December 31, 1999, the Company settled legal and
consulting fees and miscellaneous payables of $113,793 by issuing 231,950 shares
of common stock valued from $0.35 - $0.50 per share without warrants; similarly
the Company issued 500,000 shares valued at $0.74 per share in payment of its
note due to Team Rainbow of $370,000, also without warrant.
NOTE 10 - INCOME TAXES
At December 31, 1999 the Company has a U.S. tax net operating loss approximating
$4,735,000, 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 as follows:
1999 1998
---- ----
Deferred tax assets:
Net operating loss carryforwards $1,808,000 $1,233,000
Depreciation/amortization 32,000 16,000
Other 105,000 21,000
---------- -----------
Total deferred tax assets (1,945,000) (1,270,000)
Valuation allowance (1,945,000) (1,270,000)
--------- ---------
Net deferred taxes $ - $ -
=========== ===========
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 10 - INCOME TAXES (continued)
The change in valuation allowance for December 31, 1999 and 1998 was $675,000
and $1,270,000, respectively.
NOTE 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.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Commitments
The company leases office space at 2700 East Sunset Road, Suite 39, Las Vegas,
Nevada at a monthly rental of approximately $1,921.
The company has the following future minimum lease commitments for premises and
equipment:
1999
2000 23,520
2001 24,696
2002 25,932
------
$74,148
=======
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.
NOTE 13 - SUPPLEMENTAL CASH FLOW INFORMATION
During 1999, the Company issued stock for payment of debt in the amount of
$370,000.
Interest paid $ 28,932
===========
Income taxes paid $ -
===========
NOTE 14 - STOCK OPTION AND BONUS PLANS
A summary description of each Plan follows: in some cases these three Plans are
collectively referred to as the "Plans". This plan was adopted during 1998.
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 14 - STOCK OPTION AND BONUS PLANS (continued)
Incentive Stock Option Plan
The Incentive Stock Option Plan authorizes the issuance of options to purchase
up to 2,000,000 shares of the Company's Common Stock. Only officers and
employees of the Company may be granted options pursuant to the Incentive Stock
Option Plan.
In order to qualify for incentive stock option treatment under the Internal
Revenue Code, the following requirements must be complied with:
1. Options granted pursuant to the Plan must be exercised no later than:
a. The expiration of thirty (30) days after the date on which an option
holder's employment by the Company is terminated.
b. The expiration of one year after the date on which an option holder's
employment by the Company is terminated, if such termination is due to
the Employee's disability or death.
2. In the event of an option holder's death while in the employ of the
Company, his legatees or distributees may exercise (prior to the option's
expiration) the option as to any of the shares not previously exercised.
3. The total fair market value of the shares of Common Stock (determined at
the time of the grant of the option) for which any employee may be granted
options which are first exercisable in any calendar year may not exceed
$100,000.
4. Options may not be exercised until one year following the date of grant.
Options granted to an employee then owning more than 10% of the Common
Stock of the Company may not be exercisable by its terms after five years
from the date of grant.
5. The purchase price per share of Common Stock purchasable under an option
is determined by the Committee but cannot be less than the fair market
value of the Common Stock on the date of the grant of the option (or 110%
of the fair market value in the case of a person owning the Company's
stock which represents more than 10% of the total combined voting power of
all classes of stock).
Non-Qualified Stock Option Plan
The Non-Qualified Stock Option Plans authorize the issuance of options to
purchase up to 5,000,000 shares of the Company's Common Stock. The Company's
employees, directors, officers, consultants and advisors are eligible to be
granted options pursuant to the Plan, provided, however, that bona fide services
must 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 option exercise price is determined by the Committee but cannot
be less than the market price of the Company's Common Stock on the date the
option is granted.
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 14 - STOCK OPTION AND BONUS PLANS (continued)
Stock Bonus Plan
Up to 500,000 shares of Common Stock may be granted under the Stock Bonus Plans.
Such shares may consist in whole or in part of authorized but unissued shares,
or treasury shares. Under the Stock Bonus Plan, the Company's employees,
directors, officers, consultants and advisors are eligible to receive a grant of
the Company's shares, provided, however, that bona fide services must 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.
Other information regarding the Plans
The Plans are administered by the Board of Directors. The Board of Directors has
the authority to interpret the provisions of the Plans and supervise the
administration of the Plans. In addition, the Board of Directors is empowered to
select those persons to whom shares or options are to be granted to determine
the number of shares subject to each grant of a stock bonus or an option and to
determine when and upon what conditions shares or options granted under the
Plans will vest or otherwise be subject to forfeiture and cancellation.
In the discretion of the Board of Directors, any option granted pursuant to the
Plans may include installment exercise terms such that the option becomes fully
exercisable in a series of cumulating portions. The Board of Directors may also
accelerate that date upon which any option (or any part of any options) is first
exercisable. Any shares issued pursuant to the Stock Bonus Plan and any options
granted pursuant to the Incentive Stock Option Plan or the Non-Qualified Stock
Option Plan will be forfeited in the "vesting: schedule established by the Board
of Directors at the time of the grant is not met. For this purpose, vesting
means the period during which the employee must remain an employee of the
Company or the period of time a non-employee must provide services to the
Company. At the time an employee ceases working for the Company (or at the time
a non-employee ceased to perform services for the Company), any shares or
options not fully vested will be forfeited and cancelled. In the discretion of
the Board of Directors payment of the shares of Common Stock underlying options
may be paid through the delivery of shares of the Company's Common Stock having
an aggregate fair market value equal to the option price provided such shares
have been owned by the option holder for at least one year prior to such
exercise. A combination of cash and shares of Common Stock may also be permitted
at the discretion of the Board of Directors.
Options are generally non-transferable except upon death of the option holder.
Shares issued pursuant to the Stock Bonus Plan will generally not be
transferable until the person receiving the shares satisfies the vesting
requirements imposed by the Board of Directors when the shares were issued.
The Board of Directors of the Company may at any time, and from time to time,
amend, terminate or suspend one or more of the Plans in any manner it deems
appropriate provided that such amendment, termination or suspension cannot
adversely affect rights or obligations with respect to shares or options
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 14 - STOCK OPTION AND BONUS PLANS (continued)
previously granted. The Board of Directors may not, without shareholder
approval, make any amendment which would materially modify the eligibility
requirements of the Plans, increase of decrease the total number of shares of
Common Stock which may be issued pursuant to the Plans except in the case of a
reclassification of the Company's capital stock or a consolidation or merger of
the Company, reduce the minimum option price per share, extend the period for
granting options or materially increase in any other way the benefits accruing
to employees who are eligible to participate in the Plans.
The Plans are not qualified under Section 401(a) of the Internal Revenue Code,
nor are they subject to any provision of the Employee Retirement Income Security
Act of 1974.
The following sets forth certain information as of December 31, 1999 and 1998
concerning the stock options and stock bonuses granted by the Company pursuant
to its Plans. Each option represents the right to purchase one share of the
Company's Common Stock.
Shares
Shares Reserved for Remaining
Reserved Outstanding Shares Issues Options/Shares
Name of Plan Under Plan Options as Stock Bonus Under Plan
------------ ---------- ------------ -------------- ------------
Incentive Stock Option
Plan 2,000,000 -- N/A 2,000,000
Non-Qualified Stock
Option Plan 5,000,000 1,000,000 N/A 4,000,000
Stock Bonus Plan 500,000 N/A -- 500,000
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
(A development stage enterprise)
CONDENSED BALANCE SHEETS
(UNAUDITED)
March 31, 2000 December 31, 1999
ASSETS
Current assets
Cash $ 208,738 $ 22,397
Accounts receivable -- 2,635
----------------- ----------
Total Current assets 208,738 25,032
Deposits 9,879 9,879
Investments - at cost 1,956,658 1,356,658
Property and equipment - net 68,689 73,146
Goodwill - net 462,336 477,636
Intellectual property - net 4,780,289 4,933,789
------------ -----------
TOTAL ASSETS $7,486,589 $6,876,140
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 348,366 $ 385,134
Due to related parties 1,071,960 1,072,491
Loans payable 270,000 370,000
Purchase consideration payable 405,000 405,000
----------- ----------
Total current liabilities 2,095,326 2,232,625
--------- ---------
Total liabilities 2,095,326 2,232,625
SHAREHOLDERS' EQUITY
Common stock, $ 0.0001 par value, 30,000,000
authorized, 19,234,615 and 18,093,615
respectively issued and outstanding 1,924 1,810
Preferred stock $0.0001 par value,
convertible Class A, B and C
Preferred stock; 5,000,000 authorized,
32,864; 32,864; 32,864 issued and
outstanding 10 10
Additional paid in capital 11,329,083 10,795,642
Shares to be issued 760,000 138,703
Stock Based Compensation 465,000 465,000
Accumulated deficit (7,164,754) (6,757,650)
----------- -----------
Total shareholders' equity 5,391,263 4,643,515
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $7,486,589 $ 6,876,140
========== ===========
The accompanying notes are an integral part of the consolidated financial
statements
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
(A Development stage enterprise)
CONDENSED STATEMENTS OF OPERATIONS & DEFICIT
FOR THE THREE MONTHS ENDED MARCH 31
(UNAUDITED)
EXPENSES 2000 1999
----- ----
Amortization of intangible assets $ 168,800 $ 168,800
Depreciation 4,458 --
Bank charges and interest 25,997 13,230
Consulting fees 50,609 96,495
General and administration 49,934 4,226
Legal and accounting 40,492 111,976
Management fees 20,000 62,500
Office and miscellaneous 4,110 20,485
Rent 13,527 15,649
Salaries and wages -- 34,310
Contracted Services 20,466 --
Travel promotion and entertainment 8,711 12,714
-------- -------
LOSS FOR THE PERIOD 407,104 540,385
DEFICIT, BEGINNING OF PERIOD 6,757,650 4,764,323
--------- ---------
DEFICIT, END OF PERIOD $ 7,164,754 $ 5,304,708
----------- -----------
BASIC AND DILUTED LOSS PER SHARE $ 0.04 $ 0.04
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 18,664,115 14,482,563
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31
(UNAUDITED)
2000 1999
----- ----
CASH FLOW FROM OPERATING ACTIVITIES
Net loss for the period $ (407,104) $ (540,385)
Adjustments to reconcile net loss to
net cash used in operating activities:
Amortization of intangible assets 168,800 168,800
Depreciation 4,458 --
Shares issued for services rendered -- 33,700
Changes in operating assets and liabilities:
Accounts receivable 2,635 --
Prepaid expenses and deposits -- (5,144)
Accounts payable and accrued liabilities (36,768) (4,464)
---------- -----------
NET CASH USED IN OPERATING ACTIVITIES (267,979) (347,493)
---------- ----------
INVESTING ACTIVITIES
Purchase price consideration payable -- (200,000)
----------- ----------
FINANCING ACTIVITIES
Loans payable (100,000) --
Advances from (Payments to) related parties (532) 54,078
Proceeds to from capital contribution 554,852 210,000
------- --------
CASH PROVIDED BY FINANCING ACTIVITIES 454,320 264,078
------- -------
NET INCREASE (DECREASE) IN CASH
DURING PERIOD 186,341 (283,415)
------- ---------
CASH AT BEGINNING OF PERIOD 22,397 353,543
CASH AT END OF PERIOD $ 208,738 $ 70,128
=========== ===========
The accompanying notes are an integral part of the condensed financial
statements.
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2000
1. INTERIM REPORTING
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles and Form
10-QSB requirements. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. Operating results for the
three months ended March 31, 2000 are not necessarily indicative of the results
that may be expected for the year ended December 31, 2000. For further
information, refer to the financial statements and related footnotes included in
the Company's annual report on Form 10-KSB for the year ended December 31, 1999.
2. PRINCIPLES OF CONSOLIDATION
The condensed 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). All significant inter-company accounts and
transactions have been eliminated.
3. BUSINESS
The Company is engaged in the acquisition, design and development of
selected gaming products, which the company intends to sell, lease and license
in the 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.
<PAGE>
PART II
Information Not Required in prospectus
Item 24. Indemnification of Officers and Directors.
Section 145 of the Delaware General Corporation Law permits a corporation
to grant indemnification to directors, officers, employees and other agents in
terms sufficiently broad to permit indemnification under certain circumstances
for liabilities, including expenses, arising in connection with the Securities
Exchange Act of 1934, as amended, and the Securities Act of 1934, as amended.
Pursuant to the Certificate of Incorporation and Bylaws of the Company, the
Company is empowered to indemnify its directors and officers the fullest extent
permitted by law.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 or the Securities Exchange Act of 1934 may be permitted to
directors, officers or persons controlling the Company pursuant to the foregoing
provisions, the Company has been informed that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and the Securities Exchange Act of 1934
and is therefore unenforceable.
Item 25. Other Expenses of Issuance and Distribution.
-------------------------------------------
SEC Filing Fee $ 1,119
NASD Filing Fee 1,060
Blue Sky Fees and Expenses 600
Printing and Engraving Expenses 500
Legal Fees and Expenses 20,000
Accounting Fees and Expenses 5,000
Miscellaneous Expenses 1,721
---------
TOTAL $30,000
=======
All expenses other than the S.E.C. and NASD filing fees are estimated.
Item 26. Recent Sales of Unregistered Securities.
---------------------------------------
The following information sets forth all securities of Fortune which
have been sold and which were not registered under the Securities Act of 1933.
No. of Note
Date Shares Issued To Shares Issued Consideration Reference
------- ---------------- ------------- ------------- ---------
8/26/97 Bona Vista West Ltd. 100 $10 A
9/16/97 Shareholders of FET, Inc. 2,175,456 All issued and B
outstanding shares
of FET, Inc., valued
at $5,175
<PAGE>
No. of Note
Date Shares Issued To Shares Issued Consideration Reference
------- ---------------- ------------- ------------- ---------
9/17/97 Bona Vista West Ltd. 999,900 $100 A
10/14/97 Shareholders of Fortune 1,090,464 All issued and B
Entertainment Corporation, outstanding shares
a corporation organized under of Fortune Entertainment
the laws of the Bahamas Corporation (Bahamas),
valued at $385,665
3/11/98 International High
Adventures 125,000 $250,000 E
4/03/98 Gerald Wittenburg 200,000 Services rendered, A
valued at $400,000
3/12/98 William Danton and Video 505,000 Capital stock of D
Lottery Consultants Professional Video
Association, Inc.,
valued at $1,010,000
3/12/98 Two Private Investors 690,000 $517,500 A
3/15/98 Bruno Benedet 150,000 Services rendered, A
valued at $112,500
4/01/98 Moorgate Management, Inc. 200,000 Services rendered, A
valued at $150,020
4/01/98 David Jackson, Bruce 955,000 Services rendered, A
Horton and Brian Dear valued at $286,500
5/22/98 Stratford Technologies Ltd. 37,500 Services rendered, A
valued at $75,000
5/22/98 William Danton and 1,142,500 Capital Stock of D
Video Lottery Consultants Professional Video
Association, Inc.,
valued at $2,285,000
5/22/98 Five Investors 154,000 $136,800 E
5/22/98 Two Investors 50,000 Services rendered, C
valued at $50,000
6/08/98 Team Rainbow, Inc. 200,000 Assignment of rights D
to Rainbow 21
Black Jack Game,
valued at $450,000
<PAGE>
No. of Note
Date Shares Issued To Shares Issued Consideration Reference
------- ---------------- ------------- ------------- ---------
6/25/98 Four Investors 1,000,000 $750,000 C
7/22/98 Team Rainbow, Inc. 50,000 Assignment of rights D
to Rainbow 21
Black Jack Game,
valued at $112,500
7/28/98 Two Investors 200,000 $150,000 A
7/31/98 North Eastern Resources 385,551 Conversion of debt, A
Group valued at $96,390
8/17/98 Private Investment 433,333 $325,000 C
Company, Limited
10/1/98 Rodney Smith 61,366 Payment of debt, G
valued at $30,684
12/6/98 Five Investors 400,000 $200,000 A
12/7/98 Aton Select Fund Limited 300,000 $150,000 A
1998 Former holders of Series 2,420,086 Shares of Company's F
(various A, Series B, and Series C Series A, Series B and
dates) Preferred Stock Series C Preferred Stock
1/21/99 Four Investors 420,000 $210,000 A
2/25/99 Turf Holdings 300,000 $150,000 A
3/01/99 Three Investors 67,400 Services rendered, A
valued at $33,793
4/01/99 Team Rainbow, Inc. 120,000 $60,000 G
5/21/99 Two Investors 800,000 $400,000 A
8/05/99 Andrew Kaneb 150,000 $65,000 G
7/16/99 Two Investors 200,000 $100,000 A
10/12/99 Professional Trading 200,000 $100,000 G
Services
10/12/99 Dick Anagnost 150,000 Services rendered, G
valued at $80,000
<PAGE>
No. of Note
Date Shares Issued To Shares Issued Consideration Reference
------- ---------------- ------------- ------------- ---------
10/20/99 Two Investors 75,000 $26,250 G
10/20/99 Team Rainbow, Inc. 500,000 Assignment of D
rights to Rainbow 21
Black Jack Game,
valued at $370,000
11/01/99 Two Investors 91,429 $32,000 G
12/20/99 Paul Kaneb Limited 345,816 $172,908 G
Partnership
1999 Former holders of Series A, 748,714 Shares of Series A, F
(various Series B and Series C Series B and Series C
dates) Preferred Stock Preferred Stock
1/12/00 Two Investors 40,000 $18,850 G
2/14/00 Three Investors 372,000 $186,000 G
3/31/00 Four Investors 729,000 $302,000 G
4/01/00 Three Investors 253,000 $106,500
4/01/00 Genesis Investment Group 11,371 Services rendered, G
valued at $5,685
4/01/00 Genesis Investment Group 16,740 Services rendered, G
valued at $8,370
4/01/00 Genesis Millenium Capital 1,200,000 An 8% Class B member- G
ship interest in
Genesis Millennium
Capital,LLC and a 2%
Class A membership
interest in Genesis
Millennium Capital, LLC
4/01/00 Kelly, Collins, Gelinas & Day142,653 $54,928 G
4/01/00 Genesis Investment Group 14,550 Services rendered G
4/01/00 Paul Kaneb Limited 30,071 $15,035 G
Partnership
4/01/00 Richard Chase and 13,000 $4,850 G
Jeffrey Denner
4/10/00 Genesis Investment Group 24,930 Services rendered, G
valued at $12,465
<PAGE>
No. of Note
Date Shares Issued To Shares Issued Consideration Reference
------- ---------------- ------------- ------------- ---------
4/10/00 Peter Mourmourmas 14,000 Services rendered, G
valued at $7,000
4/13/00 James Reid 20,000 $10,000 G
4/13/00 Genesis Investment Group 900 Services rendered,
valued at $450 G
5/01/00 Sentry Fortress 150,000 Services rendered, G
Enterprises, Ltd. valued at $75,000
5/01/00 Danton Group:
WWT&T, Ltd. 250,000 Capital stock of D
Genesis Millennium 417,857 Professional Video
Partners Association, Inc.
Worldwide American
Technical Services, Ltd. 875,000
Worldwide American
Cadmium, Ltd 925,000
Encore Enterprises, Ltd. 875,000
Chromatin, Inc. 757,143
Independent Security,
Ltd. 600,000
A. These shares were all issued to non-U.S. persons who reside outside of the
United States. The negotiations and agreements relating to the issuance of
these shares were made by Fortune's officers (who were all Canadian
citizens) from Fortune's offices in Vancouver, British Columbia. The shares
were restricted from resale in the public markets for a period of one year
from the date of their issuance. During the one year period following the
date of their issuance none of these shares were transferred. Although
these shares were not technically issued in accordance with Regulation S,
these shares were nevertheless exempt from the registration requirements of
the Securities Act of 1933 by virtue of Release 4708, which was the
predecessor to Regulation S.
B. These shares were issued for the purposes of (i) acquiring a shareholder
base and (ii) changing Fortune's corporate domicile from the Bahamas to
Delaware. Fortune relied upon the exemption provided by Rule 504 for the
issuance of these shares.
C. Fortune relied upon the exemption provided by Regulation S for the issuance
of these shares.
D. These shares were issued to six persons in order to acquire the rights to
the Fortune Poker and the Rainbow 21 games, Fortune's primary assets.
Fortune relied upon the exemption provided by Section 4 (2) of the
Securities Act with respect to the issuance of these shares.
E. Fortune relied upon the exemption provided by Rule 504 for the issuance of
these shares.
<PAGE>
F. Fortune relied upon the exemption provided by Section 3 (a) (9) of the
Securities Act of 1933 in connection with the issuance of common stock
upon the conversion of the preferred stock.
G. Fortune relied upon the exemption provided by Section 4(2) of the
Securities Act of 1933 with respect to the issuance of these shares. The
persons who acquired these shares were sophisticated investors. Each person
had access to the same kind of information that would be available in a
registration statement, including information available on the website
maintained by the Securities and Exchange Commission. The persons who
acquired these shares acquired the shares for their own accounts. The
certificates representing the shares of common stock bear legends stating
that the shares may not be offered, sold or transferred other than pursuant
to an effective registration statement under the Securities Act of 1933, or
pursuant to an applicable exemption from registration. The shares are
"restricted" securities as defined in Rule 144 of the Securities and
Exchange Commission.
Item 27. Exhibits
Exhibits Page Number
3.1 Certificate of Incorporation (1)
----------------------
3.2 Bylaws (1)
----------------------
3.3 Certificate of Designation, preferences and
rights of Series A preferred Stock (1)
----------------------
3.4 Certificate of Designation, preferences and
rights of Series B preferred Stock (1)
----------------------
3.5 Certificate of Designation, preferences and
rights of Series C preferred Stock (1)
----------------------
5 Opinion of Counsel
------------------------
10.1 Purchase & Sale Agreement between
the Company and Video Lottery
Consultants, Inc. for Professional
Video Associates, Inc. dated September
5, 1997, as amended (2)
----------------------
10.2 Amendment Agreement dated March 9, 1999
to Purchase Sale Agreement dated
September 5, 1997 (2)
----------------------
10.3 Manufacturing Agreement dated as of April
24, 1997, between Amusement World, Inc.
and VLC, Inc. (2)
----------------------
10.4 Assignment of Manufacturing Agreement dated
July 14, 1998 between Video Lottery
Consultants, Inc. & Fortune Entertainment
Corporation (Bahamas) (2)
<PAGE>
----------------------
10.5 Amendments dated September 10, 1998 and
March 4, 1999, to Manufacturing Agreement
Dated as of April 24, 1997 (2)
----------------------
10.6 Assignment of Software Release Agreement
between William M. Danton & Fortune
Entertainment Corporation (Bahamas) (2)
----------------------
10.7 Letter Agreement between Team Rainbow,
Inc. and the Company dated November
19, 1997, as amended (2)
----------------------
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 (2)
----------------------
10.17 1998 Incentive Stock Option Plan (2)
----------------------
10.18 1998 Stock Bonus Plan (2)
----------------------
23.1 Consent of Attorneys
------------------------
23.2 Consent of Accountants ____________
24. Power of Attorney Included as part of the
Signature Page
27. Financial Data Schedules ____________
(1) Incorporated by reference from the Registrant's Registration Statement on
Form 10-SB (File No. 0-23859) effective on December 30, 1998.
(2) Incorporated by reference, and from the same exhibit number, from the
exhibits filed with the Company's annual report on Form 10-KSB for the year
ending December 31, 1998.
Item 28. Undertakings.
------------
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement.
(i) To include any prospectus required by Section l0(a)(3) of
the Securities Act of l933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
<PAGE>
represent a fundamental change in the information set forth in the Registration
Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement, including
(but not limited to) any addition or deletion of a managing underwriter.
(2) That, for the purpose of determining any liability under the
Securities Act of l933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(4) To provide to the Underwriter at the closing specified in the
underwriting agreement certificates in such denominations and registered in such
names as required by the Underwriter to permit prompt delivery to each
purchaser.
(5) Insofar as indemnification for liabilities arising under the
Securities Act of l933 may be permitted to directors, officers and controlling
persons of the Registrant, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
<PAGE>
POWER OF ATTORNEY
The registrant and each person whose signature appears below hereby
authorizes the agent for service named in this Registration Statement, with full
power to act alone, to file one or more amendments (including post-effective
amendments) to this Registration Statement, which amendments may make such
changes in this Registration Statement as such agent for service deems
appropriate, and the Registrant and each such person hereby appoints such agent
for service as attorney-in-fact, with full power to act alone, to execute in the
name and in behalf of the Registrant and any such person, individually and in
each capacity stated below, any such amendments to this Registration Statement.
SIGNATURES
Pursuant to the requirements of the Securities Act of l933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Las Vegas, Nevada, on
the 2nd day of August, 2000.
FORTUNE ENTERTAINMENT CORPORATION
By: /s/ Douglas R. Sanderson
----------------------------------
Douglas R. Sanderson, President and
Chief Executive Officer
By: /s/ Robert Eberle
-----------------------------------
Robert Eberle, Principal Financial
Officer and Chief Accounting Officer
Pursuant to the requirements of the Securities Act of l933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/ Douglas R. Sanderson
---------------------------
Douglas R. Sanderson Director July 28, 2000
/s/ Theodore Silvester, Jr.
-----------------------------
Theodore Silvester, Jr. Director July 28, 2000
/s/ Dick Anagnost
------------------------------
Dick Anagnost Director July 28, 2000
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
REGISTRATION STATEMENT
ON
FORM SB-2
EXHIBITS
